0000928658 COVENANT LOGISTICS GROUP, INC. false --12-31 Q1 2021 3,361 2,992 558 764 0.01 0.01 40,000,000 40,000,000 16,211,918 14,413,492 16,183,139 14,784,214 0.01 0.01 5,000,000 5,000,000 2,350,000 2,350,000 2,350,000 2,350,000 1,798,426 1,398,925 392 820 51 14 5 7 10 1,827 3,106 1,827 3,106 122 1,541 1,310 1,310 220,889 210,813 3,084 0.51 0.17 0.50 0.17 4 21 1.6 2.0 1.8 1.8 1.9 1.9 0.75 0 1.8 2.1 1 29.7 0 0.1 0 1,023 661 42.5 10.5 Includes derivative assets of $122 at December 31, 2020. Excludes the three months ended March 31, 2021. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2021

or

 

 

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

 

For the transition period from                        to

 

Commission File Number: 0-24960

LOGONEW.JPG  

COVENANT LOGISTICS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

88-0320154

(State or other jurisdiction of incorporation

(I.R.S. Employer Identification No.)

or organization)

 
   

400 Birmingham Hwy.

 

Chattanooga, TN

37419

(Address of principal executive offices)

(Zip Code)

 

423-821-1212

(Registrant's telephone number, including area code)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
$0.01 Par Value Class A common stock CVLG The NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒

No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒

No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

  

Accelerated filer ☒

Non-accelerated filer   ☐

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐

No ☒


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (May 4, 2021).

 

Class A Common Stock, $.01 par value: 14,402,012 shares

Class B Common Stock, $.01 par value: 2,350,000 shares

 

Page 1

 

 
 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

   

Page

Number

Item 1.

Financial Statements

 
     
 

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (unaudited)

Page 3
     
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited)

Page 4
     
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020 (unaudited)

Page 5
     
 

Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2021 and 2020 (unaudited)

Page 6
     
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)

Page 7
     
 

Notes to Condensed Consolidated Financial Statements (unaudited)

Page 8
     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Page 22
     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Page 37
     

Item 4.

Controls and Procedures

Page 38
 

PART II

OTHER INFORMATION

   

Page

Number

     

Item 1.

Legal Proceedings

Page 39
     

Item 1A.

Risk Factors

Page 40
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Page 40
     

Item 3.

Defaults Upon Senior Securities

Page 40
     

Item 4.

Mine Safety Disclosures

Page 40
     

Item 5.

Other Information

Page 40
     

Item 6.

Exhibits

Page 41

 

Page 2

 

  

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

   

March 31, 2021

   

December 31, 2020

 
   

(unaudited)

       

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 4,790     $ 8,407  

Accounts receivable, net of allowance of $3,361 in 2021 and $2,992 in 2020

    102,736       91,295  

Drivers' advances and other receivables, net of allowance of $558 in 2021 and $764 in 2020

    7,122       13,624  

Inventory and supplies

    3,471       3,119  

Prepaid expenses

    13,074       11,924  

Assets held for sale

    9,457       15,007  

Income taxes receivable

    3,747       4,155  

Other short-term assets

    -       265  

Total current assets

    144,397       147,796  
                 

Property and equipment, at cost

    526,135       541,276  

Less: accumulated depreciation and amortization

    (155,623 )     (149,824 )

Net property and equipment

    370,512       391,452  
                 

Goodwill

    42,518       42,518  

Other intangibles, net

    23,366       24,518  

Other assets, net

    65,844       60,897  
Noncurrent assets of discontinued operations     1,275       9,535  
                 

Total assets

  $ 647,912     $ 676,716  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Checks outstanding in excess of bank balances

  $ 783     $ 1,215  

Accounts payable

    32,421       31,695  

Accrued expenses

    38,646       38,538  

Current maturities of long-term debt

    6,065       7,577  

Current portion of finance lease obligations

    6,147       5,687  
Current portion of operating lease obligations     16,844       16,989  

Current portion of insurance and claims accrual

    21,770       30,221  
Other short-term liabilities     633       643  
Current liabilities of discontinued operations     816       816  

Total current liabilities

    124,125       133,381  
                 

Long-term debt

    71,803       47,888  

Long-term portion of finance lease obligations

    9,663       10,756  
Long-term portion of operating lease obligations     17,532       21,474  

Insurance and claims accrual

    43,789       44,077  

Deferred income taxes

    71,193       74,553  

Other long-term liabilities

    8,050       9,794  
Long-term liabilities of discontinued operations     5,100       44,151  

Total liabilities

    351,255       386,074  

Stockholders' equity:

               

Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,211,918 shares issued and 14,413,492 outstanding as of March 31, 2021; and 16,183,139 shares issued and 14,784,214 outstanding as of December 31, 2020

    173       173  

Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding

    24       24  

Additional paid-in-capital

    144,874       143,438  
Treasury stock at cost; 1,798,426 and 1,398,925 shares as of March 31, 2021 and December 31, 2020, respectively     (24,560 )     (17,067 )

Accumulated other comprehensive (loss) income

    (1,319 )     (2,251 )

Retained earnings

    177,465       166,325  

Total stockholders' equity

    296,657       290,642  

Total liabilities and stockholders' equity

  $ 647,912     $ 676,716  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 3

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three months ended March 31, 2021 and 2020

(In thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

(unaudited)

 
   

2021

   

2020

 

Revenues

               

Freight revenue

  $ 200,688     $ 189,581  

Fuel surcharge revenue

    20,201       21,232  

Total revenue

  $ 220,889     $ 210,813  
                 

Operating expenses:

               

Salaries, wages, and related expenses

    82,586       82,463  

Fuel expense

    22,822       25,265  

Operations and maintenance

    14,719       12,825  

Revenue equipment rentals and purchased transportation

    57,236       46,062  

Operating taxes and licenses

    2,585       3,454  

Insurance and claims

    7,838       15,611  

Communications and utilities

    1,247       1,569  

General supplies and expenses

    8,183       8,359  

Depreciation and amortization

    14,087       18,183  

Gain on disposition of property and equipment, net

    (923 )     (1,524 )

Total operating expenses

    210,380       212,267  

Operating income (loss)

    10,509       (1,454 )

Interest expense, net

    743       1,899  

(Income) Loss from equity method investment

    (2,960 )     735  

Income (Loss) before income taxes

    12,726       (4,088 )

Income tax expense (benefit)

    4,145       (1,004 )

Income (loss) from continuing operations, net of tax

    8,581       (3,084 )

Income from discontinued operations, net of tax

    2,559       871  

Net income (loss)

  $ 11,140     $ (2,213 )
                 

Basic income (loss) per share:

               

Income (loss) from continuing operations

  $ 0.51     $ (0.17 )

Income from discontinued operations

    0.15       0.05  

Net income (loss) (1)

  $ 0.66     $ (0.12 )

Diluted income (loss) per share:

               

Income (loss) from continuing operations

  $ 0.50     $ (0.17 )

Income from discontinued operations

    0.15       0.05  

Net income (loss) (1)

  $ 0.65     $ (0.12 )

Basic weighted average shares outstanding

    16,954       18,088  

Diluted weighted average shares outstanding

    17,086       18,088  

 

(1) Sum of the individual amounts may not add due to rounding.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 4

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE three months ended March 31, 2021 and 2020

(Unaudited and in thousands)

 

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
                 

Net income (loss)

  $ 11,140     $ (2,213 )
                 

Other comprehensive income (loss):

               
                 

Unrealized gain (loss) on effective portion of cash flow hedges, net of tax of ($392) in 2021 and $820 in 2020, respectively

    1,145       (2,391 )
                 

Reclassification of cash flow hedge (gains) losses into statement of operations, net of tax of $51 in 2021 and ($14) in 2020, respectively

    (150 )     41  
                 

Reclassification of gains on sale of investments classified as available-for-sale

    (63 )     -  

Total other comprehensive income (loss)

    932       (2,350 )
                 

Comprehensive income (loss)

  $ 12,072     $ (4,563 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 5

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE three months ended March 31, 2021 and 2020

(Unaudited and in thousands)

 

   

For the Three Months Ended

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

Loss

   

Earnings

   

Equity

 

Balances at December 31, 2020

  $ 173     $ 24     $ 143,438     $ (17,067 )   $ (2,251 )   $ 166,325     $ 290,642  

Net loss

    -       -       -       -       -       11,140       11,140  
Other comprehensive income     -       -       -       -       932       -       932  

Share repurchase

    -       -       -       (8,118 )     -       -       (8,118 )

Stock-based employee compensation expense

    -       -       2,594       -       -       -       2,594  

Issuance of restricted shares, net

    -       -       (1,158 )     625       -       -       (533 )

Balances at March 31, 2021

  $ 173     $ 24     $ 144,874     $ (24,560 )   $ (1,319 )   $ 177,465     $ 296,657  

 

   

For the Three Months Ended

 
                                   

Accumulated

                 
                   

Additional

           

Other

           

Total

 
   

Common Stock

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

   

Stockholders'

 
   

Class A

   

Class B

   

Capital

   

Stock

   

Income (Loss)

   

Earnings

   

Equity

 

Balances at December 31, 2019

  $ 173     $ 24     $ 141,885     $ -     $ (1,014 )   $ 209,043     $ 350,111  

Net income

    -       -       -       -       -       (2,213 )     (2,213 )

Other comprehensive loss

    -       -       -       -       (2,350 )     -       (2,350 )
Share repurchase     -       -       -       (17,515 )     -       -       (17,515 )

Stock-based employee compensation expense

    -       -       466       -       -       -       466  

Issuance of restricted shares, net

    -       -       (6 )     -       -       -       (6 )

Balances at March 31, 2020

  $ 173     $ 24     $ 142,345     $ (17,515 )   $ (3,364 )   $ 206,830     $ 328,493  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 6

 

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE three months ended March 31, 2021 and 2020

(Unaudited and in thousands)

 

    Three Months Ended March 31,  
   

2021

   

2020

 
Cash flows from operating activities:                

Net income

  $ 11,140     $ (2,213 )

Adjustments to reconcile net income to net cash provided (used) by operating activities:

               

Provision for losses on accounts receivable

    402       320  

Reversal (deferral) of gain on sales to equity method investee

    45       (2 )

Depreciation and amortization

    14,087       18,187  

Amortization of deferred financing fees

    -       37  

Deferred income tax expense (benefit)

    4,735       (904 )

Income tax (expense) benefit arising from restricted share vesting and stock options exercised

    (120 )     9  

Stock-based compensation expense

    2,594       466  

(Income) Loss from equity method investment

    (2,960 )     735  

Gain on disposition of property and equipment

    (923 )     (1,524 )
Gain on reversal of contingent loss of discontinued operations     (3,412 )     -  

Gain on investment in available-for-sale securities

    (63 )     -  

Changes in operating assets and liabilities:

               

Receivables and advances

    (6,917 )     (48,218 )

Prepaid expenses and other assets

    (1,064 )     3,802  

Inventory and supplies

    (352 )     398  
Insurance and claims accrual     (8,739 )     22,805  

Accounts payable and accrued expenses

    1,163       2,586  

Net cash flows provided (used) by operating activities

    9,616       (3,516 )
                 
Cash flows from investing activities:                
Purchase of available-for-sale securities     (33 )     245  

Acquisition of property and equipment

    (3,907 )     (35,240 )

Proceeds from disposition of property and equipment

    13,871       18,497  

Net cash flows provided (used) by investing activities

    9,931       (16,498 )
                 

Cash flows from financing activities:

               

Change in checks outstanding in excess of bank balances

    (646 )     (111 )

Proceeds from issuance of notes payable

    -       29,746  

Repayments of notes payable

    (8,713 )     (18,993 )

Repayments of finance lease obligations

    (633 )     (1,305 )

Proceeds under revolving credit facility

    216,128       411,981  

Repayments under revolving credit facility

    (220,651 )     (387,719 )

Payment of minimum tax withholdings on stock compensation

    (531 )     (6 )
Common stock repurchased     (8,118 )     (17,515 )

Net cash flows (used) provided by financing activities

    (23,164 )     16,078  
                 

Net change in cash and cash equivalents

    (3,617 )     (3,936 )
                 
Cash and cash equivalents at beginning of period     8,407       43,591  
Cash and cash equivalents at end of period   $ 4,790     $ 39,655  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 7

 

 

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1.

Significant Accounting Policies

 

Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Covenant Logistics Group, Inc., a Nevada holding company, and its wholly owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Logistics Group, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. In preparing financial statements, it is necessary for management to make assumptions and estimates affecting the amounts reported in the condensed consolidated financial statements and related notes. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. In the opinion of management, the accompanying financial statements include all adjustments that are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature.

 

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2020, condensed consolidated balance sheet was derived from our audited balance sheet as of that date. Our operating results are subject to seasonal trends when measured on a quarterly basis; therefore, operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2020. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

 

Risks and Uncertainties

 

On July 8, 2020, we sold a portfolio of accounts receivable, contract rights, and associated assets consisting of approximately $103.3 million in net funds employed (the “Portfolio”) previously held by Transport Financial Services ("TFS"), a division of Covenant Transport Solutions, LLC, an indirect wholly owned subsidiary of the Company, to a subsidiary of Triumph Bancorp, Inc. ("Triumph") for approximately $122.3 million, consisting of $108.4 million in cash and $13.9 million in Triumph stock, plus an earn-out opportunity of up to $9.9 million. After the transaction closed, the Company and Triumph became involved in a dispute over the nature of approximately $66.0 million of the assets included in the Portfolio. The dispute was resolved on September 23, 2020 with an amendment of the purchase agreement and related funding arrangements that reduced the purchase price of the Portfolio to approximately $108.4 million, representing the cash amount received by us at closing. Additionally, the earnout opportunity was terminated and we are required to sell the Triumph stock we received at closing and will deliver the net proceeds to Triumph. In October 2020, we sold the Triumph stock acquired as part of the amended purchase agreement for $28.1 million and remitted the proceeds to Triumph upon settlement. The amended purchase agreement resulted in a gain on the sale of the Portfolio of $3.7 million, net of related expenses.

 

The amended purchase agreement specifically identified approximately $62.0 million accounts within the Portfolio, which related to advances on services that had not yet been performed, were placed in a loss sharing pool to be repaid with proceeds other than those generated from ordinary working capital factoring. To the extent losses on covered accounts are incurred, we will indemnify Triumph on a dollar for dollar basis for up to the first $30.0 million of losses, and on a 50% basis for up to the next $30.0 million of losses, for total indemnification exposure of up to $45.0 million (the “TFS Settlement”). During the fourth quarter of 2020, we recorded $44.2 million of contingent liabilities, reflected as other long-term liabilities from discontinued operations in our consolidated balance sheet, because as of December 31, 2020 it was probable and estimable that such amount would be due to Triumph under the TFS Settlement. During the first quarter of 2021, we received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, all of which was reserved during the fourth quarter of 2020. Additionally, Triumph was able to collect some funds related to our fourth quarter 2020 accrual that allowed us the opportunity to reverse $3.4 million of our accrual. The payment of amounts with respect to the indemnification obligations could create volatility in our reported future financial results and could have an adverse effect on our results of operations, cash flows, available liquidity, and total indebtedness.

 

Page 8

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation for book purposes is determined using the straight-line method over the estimated useful lives of the assets. Depreciation of revenue equipment is our largest item of depreciation. We generally depreciate new tractors over five years to salvage values that range from 10% to 35% of their cost, depending on the operating segment profile of the equipment. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 28% and 21% of their cost, respectively. We annually review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in the useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations. 

 

Recent Accounting Pronouncements

 

Accounting Standards adopted

 

In December 2019, FASB issued ASU 2019-12, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. We adopted this standard effective January 1, 2021. The adoption of this standard had no impact on our consolidated financial statements and related disclosures.

 

Accounting Standards not yet adopted

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Measurement of Credit Losses on Financial Instruments, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. This update will be effective for our annual reporting period beginning January 1, 2023, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impacts the adoption of this standard will have on the consolidated financial statements.

 

Page 9

 

 

 

Note 2.

Income (Loss) Per Share

 

Basic income (loss) per share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. There were approximately 132,000 shares issuable upon conversion of unvested restricted shares for the three months ended March 31, 2021. Such shares were not included in the computation of diluted (loss) income per share for the same prior year period as the inclusion would have been anti-dilutive due to the net loss. There were 721,000 and no outstanding stock options at March 31, 2021 and March 31, 2020, respectively. Income per share is the same for both Class A and Class B shares.

 

The following table sets forth, for the periods indicated, the calculation of net income (loss) per share included in the condensed consolidated statements of operations:

 

(in thousands except per share data)

 

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Numerators:

               

Income (loss) from continuing operations

  $ 8,581     $ (3,084 )

Income from discontinued operations

    2,559       871  

Net income (loss)

  $ 11,140     $ (2,213 )

Denominator:

               

Denominator for basic income (loss) per share – weighted-average shares

    16,954       18,088  

Effect of dilutive securities:

               

Equivalent shares issuable upon conversion of unvested restricted shares

    132       -  
Equivalent shares issuable upon conversion of unvested employee stock options     -       -  

Denominator for diluted income (loss) per share adjusted weighted-average shares and assumed conversions

  $ 17,086     $ 18,088  
                 

Basic income (loss) per share:

               

Income (loss) from continuing operations

  $ 0.51     $ (0.17 )

Income from discontinued operations

    0.15       0.05  

Net income (loss) (1)

  $ 0.66     $ (0.12 )

Diluted income (loss) per share:

               

Income (loss) from continuing operations

  $ 0.50     $ (0.17 )

Income from discontinued operations

    0.15       0.05  

Net income (loss) (1)

  $ 0.65     $ (0.12 )

 

(1) Sum of the individual amounts may not add due to rounding.

Page 10

 

 

 

Note 3.

Fair Value of Financial Instruments

 

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Accordingly, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. The fair value of the commodity contracts, including our former fuel hedges, is determined based on quotes from the counterparty which were verified by comparing them to the exchange on which the related futures are traded, adjusted for counterparty credit risk. The fair value of our interest rate swap agreements is determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These analyses reflect the contractual terms of the swap, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair value of available-for-sale securities is based upon quoted prices in active markets. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs" such as estimates of current credit spreads to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate swap agreements.  A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Financial Instruments Measured at Fair Value on a Recurring Basis

 
                 

(in thousands)

               

Hedge derivatives

 

March 31, 2021

   

December 31, 2020 (1)

 

Net Fair Value of Derivative

  $ (1,827 )   $ (3,106 )

Quoted Prices in Active Markets (Level 1)

    -       -  

Significant Other Observable Inputs (Level 2)

    (1,827 )     (3,106 )

Significant Unobservable Inputs (Level 3)

    -       -  
                 

(1) Includes derivative assets of $122 at December 31, 2020.

               
                 

Available-for-sale securities

 

March 31, 2021

   

December 31, 2020

 

Fair Value of Securities

  $ 1,541     $ 1,310  

Quoted Prices in Active Markets (Level 1)

    1,541       1,310  

Significant Other Observable Inputs (Level 2)

    -       -  

Significant Unobservable Inputs (Level 3)

    -       -  

 

Our financial instruments consist primarily of cash and cash equivalents, certificates of deposit, accounts receivable, commodity contracts, accounts payable, debt, and interest rate swaps. The carrying amount of cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. 

 

Interest rates that are currently available to us for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of our long-term debt, which primarily consists of revenue equipment installment notes. The fair value of our revenue equipment installment notes approximated the carrying value as of  March 31, 2021, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility (as defined herein) approximate fair value due to the variable interest rate on that facility. There were no fuel hedge derivatives outstanding as of March 31, 2021. The fair value of all interest rate swap agreements that were in effect as of March 31, 2021 was approximately $1.8 million.

 

Page 11

 

Note 4.

Discontinued Operations

 

As of June 30, 2020, our former Factoring reportable segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had a material effect on the Company's operations and financial results. On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of TFS, which included substantially all of the assets and operations of our Factoring reportable segment. The sale consisted primarily of $103.3 million of net accounts receivable, which included $108.7 million of gross accounts receivable, less advances and rebates of $5.4 million. 

 

We have reflected the former Factoring reportable segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation.

 

The following table summarizes the results of our discontinued operations for the three months ended March 31, 2021 and 2020:

 

(in thousands)

 

Three months ended March 31,

 
   

2021

   

2020

 

Total revenue

  $ -     $ 2,739  

Operating expenses

    -       577  

Operating income

    -       2,162  

Reversal of contingent loss liability

    (3,412 )     -  

Interest expense

    -       993  

Income before income taxes

    3,412       1,169  

Income tax expense

    853       298  

Income from discontinued operations, net of tax

  $ 2,559     $ 871  

 

Operating income for the three months ended March 31, 2021 relates to the gain on the reversal of our contingent loss liability in the amount of $3.4 million. Reversal of contingent liability for the three months ended March 31, 2021 relates to the reduced exposure of future indemnification by the Company to Triumph, as a result of the collection of covered receivables identified in the amended purchase agreement, as described in Note 1.

 

Interest expense not directly attributable to or related to other operations has been allocated to discontinued operations in a manner consistent with debt needed to finance the net average funds employed by the Factoring reportable segment, multiplied by the Company’s weighted average interest rate.

The following table summarizes the major classes of assets and liabilities included as discontinued operations as of  March 31, 2021 and December 31, 2020:

(in thousands)

 

March 31, 2021

   

December 31, 2020

 

Noncurrent deferred tax asset

  $ 1,275     $ 9,535  

Noncurrent assets from discontinued operations

    1,275       9,535  

Total assets from discontinued operations

  $ 1,275     $ 9,535  
                 

Liabilities:

               

Accounts payable

  $ 816     $ 816  

Current liabilities of discontinued operations

    816       816  

Long-term contingent loss liability

    5,100       44,151  

Long-term liabilities of discontinued operations

    5,100       44,151  

Total liabilities from discontinued operations

  $ 5,916     $ 44,967  
 

There were no net cash flows related to discontinued operations for the three months ended March 31, 2021. For the three months ended March 31, 2020, discontinued operations used $22.0 million of net cash flows from operating activities, and there were no related investing or financing cash flows.

 

The following unaudited summary information is presented on a consolidated pro forma basis as if the Factoring assets were sold as of January 1, 2020.

 

(in thousands)

Three months ended March 31,

 

2021

 

2020

Total revenue

$ 220,889

 

$ 210,813

Income (loss) from continuing operations

8,581

 

(3,084)

Income (loss) per basic share from continuing operations

$ 0.51

 

$ (0.17)

Income (loss) per diluted share from continuing operations

$ 0.50

 

$ (0.17)

 

Refer to Note 1, “Significant Accounting Policies” of the accompanying condensed consolidated financial statements for further information about the amended TFS purchase agreement. 

 

Page 12

 

 

Note 5.

Segment Information

 

Until the second quarter of 2020, we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring Services. As discussed above, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020. As of September 30, 2020, the segment formerly known as Highway Services is now reflected as Expedited, given the change in business mix surrounding the exit of the majority of the solo-refrigerated business in the second quarter of 2020. In addition, given management changes and growth, we have reported Warehousing as a separate reportable segment from Managed Freight. We believe the updated reportable segments reflect our service offerings, strategic direction, and how management, including our chief operating decision maker, monitors our performance.

 

Our four reportable segments include:

 

 

Expedited: The Expedited segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.

 

 

Dedicated: The Dedicated segment provides customers with committed truckload capacity over contracted periods with the goal of three to five years in length. Equipment is either owned or leased by the Company. Many of our Dedicated contract customers are automotive companies or shippers of produce, where the nature of the product we ship requires high service standards.

 

 

Managed Freight: The Managed Freight segment includes our brokerage and transport management services (“TMS”). Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to third parties. TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs.

 

 

Warehousing: The Warehousing segment provides day-to-day warehouse management services to customers who have chosen to outsource this function.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in our 2020 Form 10-K. Substantially all intersegment sales prices are market based. We evaluate performance based on operating income of the respective business units.

 

The following table summarizes our total revenue by our four reportable segments, as used by our chief operating decision makers in making decisions regarding allocation of resources etc., for the three months ended March 31, 2021 and 2020:

 

(in thousands)

                                       

Three Months Ended March 31, 2021

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 78,481     $ 75,446     $ 51,397     $ 15,565     $ 220,889  

Intersegment revenue

    446       -       -       -       446  

Operating income (loss)

    6,237       (1,770 )     4,887       1,155       10,509  
                                         

Three Months Ended March 31, 2020

 

Expedited

   

Dedicated

   

Managed Freight

   

Warehousing

   

Consolidated

 

Total revenue from external customers

  $ 86,161     $ 81,788     $ 30,737     $ 12,127     $ 210,813  

Intersegment revenue

    2,880       -       -       -       2,880  

Operating (loss) income

    (1,757 )     (1,325 )     653       975       (1,454 )
                                         

 

(in thousands)

 

For the Three Months Ended March 31,

 
   

2021

   

2020

 

Total external revenues for reportable segments

  $ 220,889     $ 210,813  

Intersegment revenues for reportable segments

    446       2,880  

Elimination of intersegment revenues

    (446 )     (2,880 )

Total consolidated revenues

  $ 220,889     $ 210,813  

 

Page 13

 

 

Note 6.

Income Taxes

 

Income tax expense in both 2021 and 2020 varies from the amount computed by applying the federal corporate income tax rates of 21% to income before income taxes, primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages. This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before taxes. As a result, salaries, wages, and related expenses are slightly lower and our effective income tax rate is higher than the statutory rate. Generally, as pre-tax income increases, the impact of the driver per diem program on our effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven the impact of the per diem program on our effective tax rate is significant. Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods based on fluctuations in earnings.

 

Our liability recorded for uncertain tax positions as of  March 31, 2021 has decreased by less than $0.1 million since December 31, 2020.

 

The net deferred tax liability of $71.2 million primarily relates to differences in cumulative book versus tax depreciation of property and equipment, partially off-set by net operating loss carryovers and insurance claims that have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense. On a periodic basis, we assess the need for adjustment of the valuation allowance. Based on forecasted taxable income resulting from the reversal of deferred tax liabilities, primarily generated by accelerated depreciation for tax purposes in prior periods, and tax planning strategies available to us, a valuation allowance has been established at March 31, 2021, for $0.4 million related to certain state net operating loss carryforwards. If these estimates and related assumptions change in the future, we may be required to modify our valuation allowance against the carrying value of the deferred tax assets.

 

On  March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. The CARES Act, among other things, includes provisions for refundable payroll tax credits, deferral for employer-side social-security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The Company considered the impacts of the legislation in the 2020 financial statements, noting that some items are continuing to be assessed through preparation of the 2020 income tax returns.

 

Page 14

 

 

Note 7.

Debt

 

Current and long-term debt and lease obligations consisted of the following as of  March 31, 2021 and December 31, 2020:

 

(in thousands)

 

March 31, 2021

   

December 31, 2020

 
   

Current

   

Long-Term

   

Current

   

Long-Term

 

Borrowings under Credit Facility

  $ -     $ 10,477     $ -     $ 15,000  
Borrowings under the Draw Note     -       35,639       -       -  

Revenue equipment installment notes; weighted average interest rate of 1.6% at March 31, 2021, and 2.0% at December 31, 2020, due in monthly installments with final maturities at various dates ranging from December 2021 to November 2022, secured by related revenue equipment

    4,913       4,450       6,437       11,358  

Real estate notes; interest rate of 1.8% at March 31, 2021 and 1.9% at December 31, 2020 due in monthly installments with a fixed maturity at August 2035, secured by related real estate

    1,152       21,237       1,140       21,530  

Deferred loan costs

    -       -       0       0  

Total debt

    6,065       71,803       7,577       47,888  

Principal portion of finance lease obligations, secured by related revenue equipment

    6,147       9,663       5,687       10,756  

Principal portion of operating lease obligations, secured by related revenue equipment

    16,844       17,532       16,989       21,474  

Total debt and lease obligations

  $ 29,056     $ 98,998     $ 30,253     $ 80,118  

 

We and substantially all of our subsidiaries are parties to the Credit Facility with Bank of America, N.A., as agent (the "Agent") and JPMorgan Chase Bank, N.A. (together with the Agent, the "Lenders"). On October 23, 2020, we amended and extended the Credit Facility (the “Eighteenth Amendment”). The Credit Facility is a $110.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows us to request an increase in the revolving credit facility of up to $50.0 million subject to Lender acceptance of the additional funding commitment. The Credit Facility includes a letter of credit sub facility in an aggregate amount of $105.0 million and a swing line sub facility in an aggregate amount equal to the greater of $10.0 million or 10% of the Lenders' aggregate commitments under the Credit Facility from time-to-time. The Credit Facility matures in October 2025.

 

Borrowings under the Credit Facility are classified as either "base rate loans" or "LIBOR loans." Base rate loans accrue interest at a base rate equal to the greater of the Agent’s prime rate, the federal funds rate plus 0.5%, or LIBOR plus 1.0%, plus an applicable margin ranging from 0.25% to 0.75%; while LIBOR loans accrue interest at LIBOR, plus an applicable margin ranging from 1.25% to 1.75%. The applicable rates are adjusted quarterly based on average pricing availability. The unused line fee is the product of 0.25% times the average daily amount by which the Lenders' aggregate revolving commitments under the Credit Facility exceed the outstanding principal amount of revolver loans and the aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The obligations under the Credit Facility are guaranteed by us and secured by a pledge of substantially all of our assets, with the notable exclusion of any real estate or revenue equipment pledged under other financing agreements, including revenue equipment installment notes and finance leases.

 

Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $110.0 million, minus the sum of the stated amount of all outstanding letters of credit; or (B) the sum of (i) 87.5% of eligible accounts receivable, plus (ii) the least of (a) 85% of the appraised net orderly liquidation value of eligible revenue equipment, (b) 100% of the net book value of eligible revenue equipment, (c) 40.9% of the Lenders' aggregate revolving commitments under the Credit Facility, or (d) $45.0 million, plus (iii) the lesser of (a) $10.4 million or (b) 80% of the appraised fair market value of eligible real estate, as reduced by a periodic amortization amount. We had $10.5 million borrowings under the Credit Facility as of March 31, 2021, undrawn letters of credit outstanding of approximately $29.7 million, and available borrowing capacity of $69.8 million. As of March 31, 2021, there were $0.5 million of base rate and $10.0 million of LIBOR loans. Based on availability as of March 31, 2021 and 2020, there was no fixed charge coverage requirement.

 

Page 15

 

The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the Lenders' commitments may be terminated. If an event of default occurs under the Credit Facility and the Lenders cause, or have the ability to cause, all of the outstanding debt obligations under the Credit Facility to become due and payable, this could result in a default under other debt instruments that contain acceleration or cross-default provisions. The Credit Facility contains certain restrictions and covenants relating to, among other things, debt, dividends, liens, acquisitions and dispositions outside of the ordinary course of business, and affiliate transactions. Failure to comply with the covenants and restrictions set forth in the Credit Facility could result in an event of default. 

 

Pricing for the revenue equipment installment notes is quoted by the respective financial affiliates of our primary revenue equipment suppliers and other lenders at the funding of each group of equipment acquired and include fixed annual rates for new equipment under retail installment contracts. The notes included in the funding are due in monthly installments with final maturities at various dates ranging from  December 2021 to November 2022. The notes contain certain requirements regarding payment, insuring of collateral, and other matters, but do not have any financial or other material covenants or events of default except certain notes totaling $6.4 million are cross-defaulted with the Credit Facility. Additional borrowings from the financial affiliates of our primary revenue equipment suppliers and other lenders are expected to be available to fund new tractors expected to be delivered in 2021, while any other property and equipment purchases, including trailers, are expected to be funded with a combination of available cash, notes, operating leases, finance leases, and/or from the Credit Facility.

 

In August 2015, we financed a portion of the purchase of our corporate headquarters, a maintenance facility, and certain surrounding property in Chattanooga, Tennessee by entering into a $28.0 million variable rate note with a third party lender. The note contains certain restrictions and covenants that are usual and customary for a note of this nature. Failure to comply with the covenants and restrictions set forth in the note could result in an event of default. Concurrently with entering into the note, we entered into an interest rate swap to effectively fix the related interest rate to 4.2%. The note contains certain restrictions and covenants that are usual and customary for a note of this nature. Failure to comply with the covenants and restrictions set forth in the note could result in an event of default. We expect to be in compliance with our debt covenants for the next 12 months. 

 

In connection with the TFS Settlement, in September 2020, TBK Bank, SSB, as lender and agent for Triumph (“TBK Bank”), provided the Company with a $45 million line of credit (the “Draw Note”), the proceeds of which are to be used solely to satisfy our indemnification obligations under the TFS Settlement. We may borrow pursuant to the Draw Note until September 23, 2025. Any amount outstanding under the Draw Note will accrue interest at a per annum rate equal to one and one-half (1.5) percentage points over LIBOR, provided, however, that LIBOR shall be deemed to be at least 0.25%.  Accrued interest is due monthly and the outstanding principal balance is due on September 23, 2026. To secure our obligations under the TFS Settlement and the Draw Note, we pledged certain unencumbered revenue equipment with an estimated net orderly liquidation value of $60 million. The Draw Note includes usual and customary events of default for a facility of this nature and provides that, upon occurrence and continuation of an event of default, payment of all amounts payable under the Draw Note may be accelerated. During the first quarter of 2021, we received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, which was funded by drawing on the Draw Note.

 

Page 16

 

 

 

Note 8.

Lease Obligations

 

The finance leases in effect at  March 31, 2021 terminate from  September 2021 through  November 2023 and contain guarantees of the residual value of the related equipment by us.

 

 A summary of our lease obligations at March 31, 2021 and 2020 are as follows:

 

(dollars in thousands)

 

Three Months Ended

   

Three Months Ended

 
   

March 31, 2021

   

March 31, 2020

 

Finance lease cost:

               

Amortization of right-of-use assets

  $ 1,007     $ 1,037  

Interest on lease liabilities

    174       247  

Operating lease cost

    5,911       6,602  

Variable lease cost

    63       158  
                 

Total lease cost

  $ 7,155     $ 8,044  
                 

Other information

               

Cash paid for amounts included in the measurement of lease liabilities:

               

Operating cash flows from finance leases

    1,007       1,037  

Operating cash flows from operating leases

    5,974       6,760  

Financing cash flows from finance leases

    633       1,305  

Right-of-use assets obtained in exchange for new operating lease liabilities

    224       461  

Weighted-average remaining lease term—finance leases

 

1.8 years

         

Weighted-average remaining lease term—operating leases

 

2.1 years

         

Weighted-average discount rate—finance leases

    4.3 %        

Weighted-average discount rate—operating leases

    5.3 %        

 

As of  March 31, 2021 and December 31, 2020, right-of-use assets of $33.4 million and $37.4 million for operating leases and $25.1 million and $29.4 million for finance leases, respectively, are included in net property and equipment in our condensed consolidated balance sheets. Operating lease right-of-use asset amortization is included in revenue equipment rentals and purchased transportation, communication and utilities, and general supplies and expenses, depending on the underlying asset, in the condensed consolidated statement of operations. Amortization of finance leased assets is included in depreciation and amortization expense in the condensed consolidated statement of operations.

 

Our future minimum lease payments as of March 31, 2021, are summarized as follows by lease category:

 

(in thousands)

 

Operating

   

Finance

 
2021 (1)   $ 13,837     $ 6,736  

2022

    15,613       7,678  

2023

    6,852       1,607  

2024

    49       -  

2025

    9       -  

Thereafter

    -       -  

Total minimum lease payments

  $ 36,360     $ 16,021  

Less: amount representing interest

    (1,984 )     (211 )

Present value of minimum lease payments

  $ 34,376     $ 15,810  

Less: current portion

    (16,844 )     (6,147 )

Lease obligations, long-term

  $ 17,532     $ 9,663  

 

(1) Excludes the three months ended March 31, 2021.

 

Page 17

 

 

 

Note 9.

Stock-Based Compensation

 

Our Third Amended and Restated 2006 Omnibus Incentive Plan, as amended (the "Incentive Plan") governs the issuance of equity awards and other incentive compensation to management and members of the Board of Directors (the "Board"). On  July 1, 2020, the stockholders, upon recommendation of the Board, approved the Second Amendment (the “Second Amendment”) to our Third Amended and Restated 2006 Omnibus Incentive Plan (the "Incentive Plan"). The Second Amendment (i) increased the number of shares of Class A common stock available for issuance under the Incentive Plan by an additional 1,900,000 shares, (ii) added a fungible share reserve feature, under which shares subject to stock options and stock appreciation rights will be counted as one share for every share granted and shares subject to all other awards will be counted as 1.80 shares for every share granted, (iii) added a double-trigger vesting requirement upon a change in control, (iv) eliminated the Compensation Committee’s discretion to accelerate vesting, except in cases involving death or disability, (v) increased the maximum award granted or payable to any one participant under the Incentive Plan for a calendar year from 200,000 shares of Class A common stock or $2,000,000, in the event the award is paid in cash, to 500,000 shares of Class A common stock or $4,000,000, in the event the award is paid cash, (vi) re-set the date through which awards  may be made under the Incentive Plan to  June 1, 2030, and (vii) made other miscellaneous, administrative and conforming changes.

 

The Incentive Plan permits annual awards of shares of our Class A common stock to executives, other key employees, consultants, non-employee directors, and eligible participants under various types of options, restricted stock, or other equity instruments. As of  March 31, 2021, there were 1,685,323 shares remaining of the 4,200,000 shares available for award under the Incentive Plan. No participant in the Incentive Plan may receive awards of any type of equity instruments in any calendar year that relates to more than 500,000 shares of our Class A common stock or $4,000,000, in the event the award is paid in cash. No awards may be made under the Incentive Plan after June 1, 2030. To the extent available, we have issued treasury stock to satisfy all share-based incentive plans.

 

Included in salaries, wages, and related expenses within the condensed consolidated statements of operations is stock-based compensation expense of $2.6 million and $0.5 million for the three-months ended March 31, 2021 and 2020, respectively. $2.2 million of stock compensation expense recorded in 2021 relates to restricted shares, and $0.4 million relates to unvested options. All stock compensation expense recorded in the 2020 quarter relates to restricted shares, as no unvested options were outstanding during this period.

 

The Incentive Plan allows participants to pay the federal and state minimum statutory tax withholding requirements related to awards that vest or allows participants to deliver to us shares of Class A common stock having a fair market value equal to the minimum amount of such required withholding taxes. To satisfy withholding requirements for shares that vested through March 31, 2021, certain participants elected to forfeit receipt of an aggregate of 27,041 shares of Class A common stock at a weighted average per share price of $19.66 based on the closing price of our Class A common stock on the dates the shares vested in 2021, in lieu of the federal and state minimum statutory tax withholding requirements. We remitted $0.5 million to the proper taxing authorities in satisfaction of the employees' minimum statutory withholding requirements.

 

Note 10.

Commitments and Contingencies

 

From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of which involves claims for personal injury and property damage incurred in connection with the transportation of freight.

 

Our subsidiary Covenant Transport, Inc. (“Covenant Transport”) is a defendant in a lawsuit filed on November 9, 2018, in the Superior Court of Los Angeles County, California. The lawsuit was filed on behalf of Richard Tabizon (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The complaint asserts that the time period covered by the lawsuit is from October 31, 2014 to the present and alleges claims for failure to properly pay drivers for rest breaks, failure to provide accurate itemized wage statements and/or reimbursement of business related expenses, unlawful deduction of wages, failure to pay proper minimum wage and overtime wages, failure to provide all wages due at termination, and other related wage and hour claims under the California Labor Code. Since the original filing date, the case has been removed from the Los Angeles Superior Court to the U.S. District Court in the Central District of California and subsequently the case was transferred to the U.S. District Court in the Eastern District of Tennessee where the case is now pending. Subsequent to March 31, 2021, this lawsuit was settled at mediation for an immaterial amount, pending court approval. Our accruals related to this claim as of March 31, 2021 were sufficient to cover this settlement.

 

On February, 28 2019, Covenant Transport was named in a separate (but related) lawsuit filed in the Superior Court of Los Angeles County, California requesting civil penalties under the California Private Attorneys’ General Act for the same underlying wage and hour claims at issue in the putative class action case noted above. On August 1, 2019, the Los Angeles Superior Court entered an order staying the action pending completion of the earlier-filed action that is pending in the United States District Court for the Eastern District of Tennessee. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of March 31, 2021.

 

On August 2, 2018, Curtis Markson, et al. (collectively, “Markson”), filed a putative class action case in United States District Court, Central District of California generically claiming that five (5) specified trucking companies (including our subsidiary Southern Refrigerated Transport, Inc.) entered into a "no poaching conspiracy" in which they agreed not to solicit or hire employees in California who were "under contract" with a fellow defendant. The allegations center around new drivers in California who received their commercial driver's license through driving schools associated with, or paid for by, one of the named defendants, in exchange for agreeing to drive for that defendant carrier for a specified amount of time (typically 8-10 months). Over the ensuing 1824 months, the Plaintiffs added more trucking companies as co-defendants in the lawsuit, including Covenant Transport on April 23, 2020. The lawsuit claims that the named defendants sent letters to one another, providing notice of "under contract" status, if these new California drivers were hired by another defendant carrier prior to the driver completing their contractual obligations. Plaintiffs contend that these notifications evidence a collusive agreement by the named defendants to restrain competition among trucking companies in California and suppress wages. Southern Refrigerated Transport, Inc. and Covenant Transport, Inc. are vigorously defending themselves against these claims. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of March 31, 2021.

 

Page 18

 

On February 11, 2021, a lawsuit was filed against Covenant Transport on behalf of Wesley Maas (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The lawsuit was filed in the Superior Court of San Bernardino County, California. The Complaint alleges claims for failure to pay all lawful wages, failure to provide lawful meal and rest periods or compensation in lieu thereof, failure to timely pay wages, failure to comply with itemized wage statement provisions, failure to indemnify for expenditures, and violations of California Labor Code and unfair competition laws. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of  March 31, 2021. 

 

Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, discussed above, taking into account existing reserves, is not likely to have a materially adverse effect on our condensed consolidated financial statements, however, any future liability claims would impact this analysis.

 

We had $29.7 million of outstanding and undrawn letters of credit as of March 31, 2021 and December 31, 2020. The letters of credit are maintained primarily to support our insurance programs. Additionally, we had $9.4 million of availability on a line of credit from Triumph solely to fund any indemnification owed to Triumph in relation to the sale of TFS.

 

 

Note 11.

Equity Method Investment

 

We own a 49.0% interest in Transport Enterprise Leasing, LLC ("TEL"), a tractor and trailer equipment leasing company and used equipment reseller. There is no loss limitation on our 49.0% interest in TEL. We have not guaranteed any of TEL's debt and have no obligation to provide funding, services, or assets. In May 2016, the operating agreement with TEL was amended to, among other things, remove the previously agreed to fixed date purchase options. Our option to acquire up to the remaining 51% of TEL would have expired May 31, 2016, and TEL’s majority owners would have received the option to purchase our ownership in TEL. There are no current put rights to purchase or sell with any owners. TEL’s majority owners are generally restricted from transferring their interests in TEL, other than to certain permitted transferees, without our consent. There are no third party liquidity arrangements, guarantees, and/or other commitments that may affect the fair value or risk of our interest in TEL.

 

We sold $0.8 million and no tractors or trailers to TEL during the three-months ended March 31, 2021 and 2020, respectively, and we received $0.3 million and $2.3 million, respectively, for providing various maintenance services, certain back-office functions, and for miscellaneous equipment. There was no equipment purchased from TEL during the three-months ended March 31, 2021 and 2020. Additionally, we paid less than $0.1 million to TEL for leases of revenue equipment during each of the three-months ended March 31, 2021 and 2020.  We recognized a net deferral of gains totaling less than $0.1 million and net reversal of previously deferred gains totaling less than $0.1 million for the three-months ended March 31, 2021 and 2020, respectively, representing 49% of the gains on units sold to TEL less any gains previously deferred and recognized when the equipment was subsequently sold to a third party. Deferred gains, totaling $0.3 million and $0.2 million at  March 31, 2021 and 2020, respectively, are being carried as a reduction in our investment in TEL. At  March 31, 2021 and  December 31, 2020, we had accounts receivable from TEL of $1.0 million and $0.7 million, respectively, related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL’s behalf.

 

We have accounted for our investment in TEL using the equity method of accounting, and thus our financial results include our proportionate share of TEL's 2021 net income through March 31, 2021, or $3.0 million. We received no equity distributions from TEL during the three-months ended March 31, 2021 and 2020.

 

Our accounts receivable from TEL and investment in TEL as of  March 31, 2021 and 2020 are as follows:

 

Description:

Balance Sheet Line Item:

March 31, 2021

 

December 31, 2020

Accounts receivable from TEL

Driver advances and other receivables

$ 1,023

 

$ 661

Investment in TEL

Other assets

37,281

 

34,365

 

Our accounts receivable from TEL related to cash disbursements made pursuant to our performance of certain back-office and maintenance functions on TEL’s behalf.

 

See TEL's summarized financial information below:

 

(in thousands)

 

As of March 31,

   

As of December 31,

 
   

2021

   

2020

 

Total Assets

  $ 322,254     $ 374,591  

Total Liabilities

    255,059       318,743  

Total Equity

  $ 67,195     $ 55,848  

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Revenue

  $ 22,903     $ 25,221  

Cost of Sales

    1,143       4,769  

Operating Expenses

    13,905       18,875  

Operating Income

    7,855       1,577  

Net Income (Loss)

  $ 6,003     $ (1,442 )

 

Page 19

 

 

 

Note 12.

Goodwill and Other Assets

 

On July 3, 2018, we acquired 100% of the outstanding stock of Landair Holdings, Inc., a Tennessee corporation (“Landair”). Landair is a dedicated and for-hire truckload carrier, as well as a supplier of transportation management, warehousing and logistics inventory management services. Landair’s results have been included in the consolidated financial statements since the date of acquisition. Landair’s trucking operations’ results are reported within our Dedicated reportable segment, while Landair’s logistics operations’ results are reported within our Managed Freight and Warehousing reportable segments.

 

There was no change to the gross amount of identifiable intangible assets during the three-months ended March 31, 2021. At the end of its useful life, the Landair trade name will have a residual value of $0.5 million. Amortization expense of $1.2 million and $0.7 million for the three-months ended March 31, 2021 and 2020, respectively, was included in depreciation and amortization in the condensed consolidated statements of operations.

 

A summary of other intangible assets as of  March 31, 2021 and  December 31, 2020 is as follows:

 

(in thousands)

 

March 31, 2021

 
   

Gross intangible assets

   

Accumulated amortization

   

Net intangible assets

   

Remaining life (months)

 

Trade name:

                               

Dedicated

  $ 2,402     $ (1,512 )   $ 890          

Managed Freight

    999       (629 )     370          
Warehousing     999       (629 )     370          

Total trade name

    4,400       (2,770 )     1,630       6  

Non-Compete agreement:

                               

Dedicated

    914       (914 )     -          

Managed Freight

    130       (130 )     -          
Warehousing     356       (356 )     -          

Total non-compete agreement

    1,400       (1,400 )     0       -  

Customer relationships:

                               

Dedicated

    14,072       (3,225 )     10,847          

Managed Freight

    1,692       (389 )     1,303          
Warehousing     12,436       (2,850 )     9,586          

Total customer relationships:

    28,200       (6,464 )     21,736       111  

Total other intangible assets

  $ 34,000     $ (10,634 )   $ 23,366          

 

The carrying amount of goodwill was $42.5 million at March 31, 2021 and December 31, 2020, respectively.

 

Page 20

 

 

Note 13.

Equity

 

On February 10, 2020, our Board approved the repurchase of up to $20.0 million worth of the Company’s outstanding Class A common stock. The program was suspended on March 26, 2020, with approximately $2.5 million remaining authorized.

 

On January 25, 2021, our Board approved the repurchase of up to $40.0 million worth of the Company's outstanding Class A common stock. There were 0.5 million and 1.4 million shares repurchased in the open market for $8.1 million and $17.5 million during the three-months ended March 31, 2021 and 2020, respectively. The Company has the ability to repurchase up to $31.9 million worth of the Company's outstanding Class A common stock under the current stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors.

 

Note 14.

Liquidity

 

Our business requires significant capital investments over the short-term and the long-term. We generally finance our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. We had working capital (total current assets less total current liabilities) of $20.3 million and $14.4 million at March 31, 2021 and December 31, 2020, respectively. Based on our expected financial condition, net capital expenditures, and results of operations and related net cash flows, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs for at least the next year.

 

As of March 31, 2021, we had $10.5 million borrowings outstanding, undrawn letters of credit outstanding of approximately $29.7 million, and available borrowing capacity of $69.8 million under the Credit Facility. Additionally, we had $9.6 million of availability on a line of credit from Triumph solely to fund any indemnification owed to Triumph in relation to the sale of TFS. Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment.

 

During the first half of 2020, in response to the uncertainty of the upcoming economic environment as a result of COVID-19 and as part of our strategic focus to reduce overhead costs, we took measures to preserve our liquidity, including capital reductions, financing, cost reduction, and working capital actions. During 2020, we paid down approximately $200.0 million of debt and lease obligations and plan to continue to pay down debt as we are able. If needed, we have other potential flexible sources of liquidity that we can leverage, such as currently unencumbered owned revenue equipment.

 

 
Page 21

 

 

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The condensed consolidated financial statements include the accounts of Covenant Logistics Group, Inc., a Nevada holding company, and its wholly owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Logistics Group, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to future reclassification of losses arising from derivative instruments and the performance of counterparties to such instruments, future impact of accounting standards, future third-party transportation provider expenses, future tax rates, expenses, and deductions, expected freight demand and volumes and trucking industry conditions, potential results of a default and testing of our fixed charge covenant under the Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), expected capital expenditures, allocations, and requirements, future customer relationships, expected debt reduction, including future interest expense, future driver market conditions, expected cash flows, expected operating income, future investments in and growth of our segments and services, expected adjusted operating ratio, future trucking capacity, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation and the impact of our cost saving measures, expected net fuel costs, strategies for managing fuel costs, the effectiveness and impact of, and cash flows relating to, our fuel surcharge programs, future fluctuations in operations and maintenance expenses, expected effects and mix of our solo and team operations, future fleet size, management, and upgrades, the market value of used equipment, including equipment subject to operating or finance leases relative to our payment obligations under such operating leases (including residual value guarantees and the proceeds from the sale thereof), the anticipated impact of our investment in TEL, the future impact of our restructuring activities, strategic plan, and other strategic initiatives, anticipated levels of and fluctuations relating to insurance, claims, and litigation expenses, , including the erosion of available limits in our aggregate insurance policies and possible additional expense to reinstate certain insurance policies, our disposition of the assets of TFS, including any future indemnification obligations related to the TFS Portfolio, and the anticipated impact of the COVID-19 outbreak or other similar outbreaks, among others, are forward-looking statements.  -looking statements may be identified by the use of terms or phrases such as "believe," "may," "could," "would," "will," "expects," "estimates," "projects," "anticipates," "plans," " outlook," "focus," "seek," "potential," "continue," "goal," "target," "objective," "intends," derivations thereof, and similar terms and phrases. Such statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2020, as amended. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2020, as amended, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

 

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

 

Executive Overview

 

For the first quarter of 2021, we were pleased to report earnings per share of $0.65, which is the highest first quarter earnings in the Company's history. The team was able to exceed our previous best first quarter result in 2015 by 16%, or $0.09 per share, on a GAAP basis. The resolve and hard work of our team over the last year, transforming our company into a multi-service logistics company is bearing fruit and we’re honored to serve and lead an exceptional team.

 

Perhaps even more encouraging is the fact that we are less than a year into restructuring our business and have substantial remaining opportunity for further improvement. In the short run, this means continuing to improve or replace underperforming freight contracts, and in the long run, this means holding ourselves accountable for improved margins and returns across all aspects of our business. The freight market this year was noticeably stronger than the prior year's quarter due to growing economic activity, supply chain disruptions, and an intensifying national driver shortage all of which have continued into the second quarter. The full impact of these factors on our operating statistics year-over-year is complicated by changes in business mix due to downsizing our refrigerated fleet and solo tractor count in the Expedited business, as well as severe winter weather in February.  We expect year-over-year comparability to be clearer in the second half of 2021.

 

The following is a summary of infrequent and (or) non-cash transactions that occurred during the first quarter of 2021:

 

Reversal of contingent loss liability in discontinued operations

$  (3.4) million

Intangible asset amortization $    1.2 million

Net first quarter expense adjustment

$  (2.2) million

 

Page 22

 

As of June 30, 2020, our Factoring segment was classified as discontinued operations as it: (i) was a component of the entity, (ii) met the criteria as held for sale, and (iii) had a material effect on the Company's operations and financial results. On July 8, 2020, we closed on the disposition of substantially all of the operations and assets of TFS, a division of Covenant Transport Solutions LLC, an indirect wholly owned subsidiary of the Company, which included substantially all of the assets and operations of our Factoring segment. Beginning with the period ended June 30, 2020, we have reflected the former Factoring segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation.

 

Additional items of note for the  first quarter of  2021 include the following:
 
 

Total revenue of $220.9 million, an increase of 4.8% compared with the first quarter of 2020, and freight revenue (which excludes revenue from fuel surcharges) of $200.7 million, an increase of 5.9% compared with the first quarter of 2020, despite our reduced tractor fleet;

     
 

Operating income of $10.5 million, compared with operating loss of $1.5 million in the first quarter of 2020;

     
 

Net income of $11.1 million, or $0.65 per diluted share, compared with net loss of $2.2 million, or ($0.12) per diluted share, in the first quarter of 2020. Net income from continuing operations of $8.6 million, or $0.50 per basic share, compared to $3.1 million net loss from continuing operations or ($0.17) per diluted share, in the first quarter of 2020. Net income from discontinued operations of $2.5 million, or $0.15 per diluted share, compared to net income from discontinued operations of $0.9 million, or $0.05 per diluted share, in the first quarter of 2020.

     
 

35% of consolidated total revenue was in our more volatile Expedited reportable segment, as compared to 41% in the first quarter of 2020;

     
 

Our Managed Freight reportable segment’s total revenue increased to $51.4 million in the 2021 quarter from $30.7 million in the 2020 quarter and the segment had an operating income of $4.9 million in the 2021 quarter compared to operating income of $4.2 million in the 2020 quarter; 

     
 

Our equity investment in TEL has fully recovered from the soft equipment market and provided $3.0 million of pre-tax earnings in the first quarter of 2021 and provided $0.7 million in the first quarter of 2020;

     
  We received an indemnification call from Triumph of $35.6 million related to the TFS Settlement, all of which was reserved during the fourth quarter of 2020. Additionally, Triumph was able to collect some funds related to our fourth quarter 2020 accrual that allowed us the opportunity to reverse $3.4 million of our accrual;
     
  We were able to repurchase approximately 460,000 shares of our Class A common stock at $8.1 million;
     
 

Since December 31, 2020, total indebtedness, net of cash, increased by $21.3 million to $123.3 million, primarily related to the indemnification call under the TFS Settlement, and with available borrowing capacity of $69.8 million under our Credit Facility at March 31, 2021, we do not expect to be required to test our fixed charge covenant in the foreseeable future; and

     
 

Stockholders' equity and tangible book value at March 31, 2021, were $296.7 million and $230.8 million, respectively.

 

Outlook

 

Going forward, our short-term focus will be to improve the profitability of our Dedicated segment. The freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. Potential headwinds include inefficiencies from re-engineering or replacing certain contracts, driver availability and cost, accident experience, the cost and volatility of claims, general inflation, and supply and demand factors for our customers and our industry. At present, we expect to make steady, incremental progress on our Dedicated segment’s margins over the remainder of 2021. We feel the freight market will continue to provide opportunities for price and utilization improvement to battle the driver market and other cost headwinds, primarily casualty insurance.

 

Over time, we expect our Managed Freight segment’s margin to gravitate toward the mid-single digits and Dedicated to gravitate toward the mid to high single digits and ultimately double digits.  Directionally the margin changes may offset each other to some extent as the freight and driver markets return to more balanced levels.

 

For the longer term, we expect to continue the execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously under-invested areas.  With diligence and accountability, we expect to make consistent progress and be a stronger, more profitable, and more predictable business with the opportunity for significant and sustained value creation.

 

Page 23

 

Non-GAAP Reconciliation

 

In addition to operating ratio, we use "adjusted operating ratio" as a key measure of profitability. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Adjusted operating ratio means operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. We believe the use of adjusted operating ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices, amortization of intangibles, and significant unusual items. Our Board and management focus on our adjusted operating ratio as an indicator of our performance from period to period. We believe our presentation of adjusted operating ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

 

Operating Ratio

 

   

Three Months Ended March 31,

GAAP Operating Ratio:

 

2021

   

OR %

 

2020

   

OR %

Total revenue

  $ 220,889             $ 210,813          

Total operating expenses

    210,380     95.2%     212,267     100.7%

Operating income (loss)

  $ 10,509             $ (1,454 )        
                                 

Adjusted Operating Ratio:

 

2021

   

Adj. OR %

 

2020

   

Adj. OR %

Total revenue

  $ 220,889             $ 210,813          

Fuel surcharge revenue

    (20,201 )             (21,232 )        

Freight revenue (total revenue, excluding fuel surcharge)

    200,688               189,581          
                                 

Total operating expenses

    210,380               212,267          

Adjusted for:

                               

Fuel surcharge revenue

    (20,201 )             (21,232 )        

Amortization of intangibles

    (1,152 )             (731 )        

Adjusted operating expenses

    189,027     94.2%     190,304     100.4%

Adjusted operating income (loss)

  $ 11,661             $ (723 )        

 

 

Page 24

 

Revenue and Expenses

 

We focus on targeted markets throughout the United States where we believe our service standards can provide a competitive advantage. We are a major carrier for transportation companies such as parcel freight forwarders, less-than-truckload carriers, and third party logistics providers that require a high level of service to support their businesses, as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers. 

 

Until the second quarter of 2020, we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring Services. As discussed above, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020. As of September 30, 2020, the segment formerly known as Highway Services is now reflected as Expedited, given the change in business mix surrounding the exit of the majority of the solo-refrigerated business in the second quarter of 2020. In addition, given management changes and growth, we have reported Warehousing as a separate reportable segment from Managed Freight. We believe the updated reportable segments reflect our service offerings, strategic direction, and how management, including our chief operating decision makers, monitors our performance.

 

Our four reportable segments include:

 

 

Expedited: The Expedited segment primarily provides truckload services to customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. Expedited services generally require two-person driver teams on equipment either owned or leased by the Company.

 

 

Dedicated: The Dedicated segment provides customers with committed truckload capacity over contracted periods with the goal of three to five years in length. Equipment is either owned or leased by the Company. Many of our Dedicated contract customers are automotive companies or shippers of produce, where the nature of the product we ship requires high service standards.

 

 

Managed Freight: The Managed Freight segment includes our brokerage and transport management services (“TMS”). Brokerage services provide logistics capacity by outsourcing the carriage of customers’ freight to third parties. TMS provides comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs.

 

 

Warehousing: The Warehousing segment provides day-to-day warehouse management services to customers who have chosen to outsource this function.

 

In our Expedited and Dedicated reportable segments, we primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile for our truckload services. We enhance our truckload revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that could affect our Expedited revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of shipments and miles we generate. The main factors that could affect our Dedicated revenue are the rates and utilization under the contracts with our Dedicated customers. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

 

The main expenses that impact the profitability of our Expedited and Dedicated reportable segments are the variable costs of transporting freight for our customers. These costs include fuel expenses, driver-related expenses, such as wages, benefits, training, and recruitment, and purchased transportation expenses, which primarily include compensating independent contractors. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, self-insured retention versus insurance premiums, fleet age, efficiency, and other factors. Historically, our main fixed costs include rentals and depreciation of long-term assets, such as revenue equipment and terminal facilities, and the compensation of non-driver personnel.

 

Page 25

 

Within our Expedited and Dedicated reportable segments, we operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver tractors generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. In contrast, our two-person driver tractors generally operate in longer lengths of haul, generate greater miles per tractor, and experience fewer non-revenue miles, but we typically receive lower revenue per loaded mile and incur higher employee expenses of compensating both drivers. We expect operating statistics and expenses to shift with the mix of single and team operations.

 

Within our Managed Freight reportable segment, we derive revenue from arranging transportation services, directly and through agents, who are paid a commission for the freight they provide, for customers on both an ad-hoc and a contractual basis. We provide these services directly and through relationships with thousands of third-party carriers and integration with our Expedited reportable segment. We also utilize technology and process management to provide detailed visibility into a customer’s movement of freight – inbound and outbound – throughout the customer’s network and can provide focused customer support through multiyear contracts. The main factors that impact profitability in terms of expenses are the variable costs of outsourcing the transportation freight for our customers and managing fixed costs, including salaries, and selling, general, and administrative expenses. 

 

Within our Warehousing reportable segment, we empower customers to outsource warehousing management, including moving containers and trailers in or around freight yards. The main factors that impact profitability in terms of expenses are fixed costs, including salaries, facility warehousing costs, and selling, general, and administrative expenses. 

 

In May 2011, we acquired a 49.0% interest in TEL. TEL is a tractor and trailer equipment leasing company and used equipment reseller. We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income since May 2011.

 

Our main measures of profitability are operating ratio and adjusted operating ratio, which we define as operating expenses, net of fuel surcharge revenue, excluding amortization of intangibles, and significant unusual items, divided by total revenue, less fuel surcharge revenue. See page 24 for the uses and limitations associated with adjusted operating ratio.

 

Revenue Equipment

 

At March 31, 2021, we operated 2,530 tractors and 5,555 trailers. Of such tractors, 1,676 were owned, 673 were financed under operating leases, and 181 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 4,852 were owned,  625 were financed under finance type leases, and 78 were held under short-term operating leases. We finance a small portion of our trailer fleet and larger portion of our tractor fleet with operating leases, which generally run for a period of three to five years for tractors and five to seven years for trailers. At March 31, 2021, our fleet had an average tractor age of 1.8 years and an average trailer age of 4.5 years.

 

Independent contractors provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing or leasing the tractor. The payments to independent contractors and the financing of equipment under operating leases are recorded in revenue equipment rentals and purchased transportation. Expenses associated with owned equipment, such as interest and depreciation, and expenses associated with employee drivers, including driver compensation, fuel, and other expenses, are not incurred with respect to independent contractors. Obtaining equipment from independent contractors and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, and as such, we evaluate our efficiency using net income margin as well as operating ratio.

 

Page 26

 

 

 

RESULTS OF CONSOLIDATED OPERATIONS

 

COMPARISON OF three months ended March 31, 2021 TO three months ended March 31, 2020

 

The following tables set forth the percentage relationship of certain items to total revenue and freight revenue (total revenue less fuel surcharge revenue) for the periods indicated, where applicable (dollars in thousands):

 

Revenue

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Revenue:

               

Freight revenue

  $ 200,688     $ 189,581  

Fuel surcharge revenue

    20,201       21,232  

Total revenue

  $ 220,889     $ 210,813  

 

The increase in revenue resulted from a $20.7 million and $3.4 million increase in Managed Freight and Warehousing freight revenue, respectively, partially offset by a decrease of $7.7 million and $5.3 million in Expedited and Dedicated freight revenue, respectively.

 

See results of segment operations section for discussion of fluctuations.

 

For comparison purposes in the discussion below, we use total revenue and freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. 

 

For each expense item discussed below, we have provided a table setting forth the relevant expense first as a percentage of total revenue, and then as a percentage of freight revenue.

 

Salaries, wages, and related expenses

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Salaries, wages, and related expenses

  $ 82,586     $ 82,463  

% of total revenue

    37.4 %     39.1 %

% of freight revenue

    41.2 %     43.5 %

 

The slight increase on a dollars basis was primarily the result of substantial cents per mile driver pay increases made effective in early January 2021, as well as management incentive compensation attributable to favorable first quarter results, offset by decreases in workers' compensation insurance and the aforementioned fleet reduction. The decreases on a percentage basis are due to increased revenue over which to spread those costs.

 

For the remainder of 2021 we believe salaries, wages, and related expenses will increase in comparison to the first quarter of 2021 and 2020 as a result of driver pay changes put in place as a result of the tight freight market, partially offset by fewer drivers as a result of our change in business model and our smaller fleet. Additionally, starting with the second quarter of 2021, we expect salaries, wages, and related expenses to increase period over period as the result of reinstatement of the 401(k) match and, in certain periods, increased incentive compensation due to improved performance.  Salaries, wages, and related expenses will fluctuate to some extent based on the percentage of revenue generated by independent contractors and our Managed Freight reportable segment, for which payments are reflected in the purchased transportation line item.

 

Page 27

 

 

Fuel expense

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Fuel expense

  $ 22,822     $ 25,265  

% of total revenue

    10.3 %     12.0 %

% of freight revenue

    11.4 %     13.3 %

 

We receive a fuel surcharge on our loaded miles from most shippers; however, this does not cover the entire cost of fuel for several reasons, including the following: surcharges cover only loaded miles we operate; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business relating to shipments obtained from freight brokers does not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.

 

The rate of fuel price changes also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the Department of Energy ("DOE") for the week prior to the shipment, meaning we typically bill customers in the current week based on the previous week's applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Fuel prices as measured by the DOE were $0.08 per gallon higher in the three months ended March 31, 2021 compared with the same quarter in 2020.

 

To measure the effectiveness of our fuel surcharge program, we subtract fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors and other third parties which is included in purchased transportation) from our fuel expense. The result is referred to as net fuel expense. Our net fuel expense as a percentage of freight revenue is affected by the cost of diesel fuel net of fuel surcharge revenue, the percentage of miles driven by company tractors, our fuel economy, our percentage of deadhead miles, for which we do not receive material fuel surcharge revenues, and the net impact of fuel hedging gains and losses.

 

Net fuel expense is shown below:

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Total fuel surcharge

  $ 20,201     $ 21,232  

Less: Fuel surcharge revenue reimbursed to owner operators and other third parties

    1,651       2,781  

Company fuel surcharge revenue

  $ 18,550     $ 18,451  

Total fuel expense

  $ 22,822     $ 25,265  

Less: Company fuel surcharge revenue

    18,550       18,451  

Net fuel expense

  $ 4,272     $ 6,814  

% of freight revenue

    2.1 %     3.6 %

 

The decrease in net fuel expense is primarily due to higher fuel surcharge recovery, partially offset by slightly higher fuel prices.  Additionally there were $0.4 million of diesel fuel hedge gains for the quarter, compared to none for the same 2020 quarter. Also, as a result of the change in our business mix our fleet was more fuel efficient due to less idling and less temperature controlled freight thus reducing reefer fuel expense. As of March 31, 2021, we had no remaining fuel hedging contracts.

 

We expect to continue managing our idle time and tractor speeds, investing in more fuel-efficient tractors to improve our miles per gallon, locking in fuel hedges when deemed appropriate, and partnering with customers to adjust fuel surcharge programs that are inadequate to recover a fair portion of fuel costs. Going forward, our net fuel expense is expected to fluctuate as a percentage of revenue based on factors such as diesel fuel prices, percentage recovered from fuel surcharge programs, percentage of uncompensated miles, percentage of revenue generated by team-driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue), percentage of revenue generated by refrigerated operations (which uses diesel fuel for refrigeration but usually does not recover fuel surcharges on refrigeration fuel), percentage of revenue generated from independent contractors, and the success of fuel efficiency initiatives.

 

Page 28

 

 

Operations and maintenance

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Operations and maintenance

  $ 14,719     $ 12,825  

% of total revenue

    6.7 %     6.1 %

% of freight revenue

    7.3 %     6.8 %

 

The increases in operations and maintenance for the three months ended March 31, 2021 were primarily related to an additional $1.1 million in costs related to the recruitment and onboarding of drivers when compared to the prior year quarter, despite the 2021 fleet reductions. This increase is attributable to the extremely tight driver market and our focused effort to seat more of our tractors. In addition, in the prior year quarter we had a significant amount of revenue equipment that had been parked and was being prepared for sale. Costs incurred to prepare equipment for disposal is deferred and recognized as part of the net gain or loss on disposal when the equipment is sold. Disposal costs incurred in the prior year quarter were $1.1 million greater than the current year quarter. Offsetting these year-over-year increases were a reduction in tolls, cargo damage, and other costs associated with temperature-controlled freight that was exited in the second quarter of 2020 as a result of our business restructuring.

 

Going forward, we believe this category will fluctuate based on several factors, including the condition of the driver market and our ability to hire and retain drivers, our continued ability to maintain a relatively young fleet, accident severity and frequency, weather, and the reliability of new and untested revenue equipment models.

 

Revenue equipment rentals and purchased transportation

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Revenue equipment rentals and purchased transportation

  $ 57,236     $ 46,062  

% of total revenue

    25.9 %     21.8 %

% of freight revenue

    28.5 %     24.3 %

 

The increases in revenue equipment rentals and purchased transportation were primarily the result of a more competitive market for sourcing third-party capacity and growth in the Managed Freight reportable segment, partially offset by a reduction in the percentage of the total miles run by independent contractors from 12.0% for the three months ended March 31, 2020, to 8.9% for the same 2021 period.

 

When compared year-over-year, we expect revenue equipment rentals to decrease going forward as a result of the reduction of our tractor fleet. However, we expect purchased transportation to increase as we seek to grow the Managed Freight reportable segment. In addition, if fuel prices increase, it would result in a further increase in what we pay third party carriers and independent contractors. However, this expense category will fluctuate with the number and percentage of loads hauled by independent contractors, loads handled by Managed Freight, and tractors, trailers, and other assets financed with operating leases. In addition, factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category. If industry-wide trucking capacity continues to tighten in relation to freight demand, we may need to increase the amounts we pay to third-party transportation providers and independent contractors, which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue. If we were to recruit more independent contractors we would expect this line item to increase as a percentage of revenue.

 

Operating taxes and licenses 

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Operating taxes and licenses

  $ 2,585     $ 3,454  

% of total revenue

    1.2 %     1.6 %

% of freight revenue

    1.3 %     1.8 %

 

For the periods presented, the changes in operating taxes and licenses were not significant as either a percentage of total revenue or freight revenue.

 

Page 29

 

 

Insurance and claims

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Insurance and claims

  $ 7,838     $ 15,611  

% of total revenue

    3.5 %     7.4 %

% of freight revenue

    3.9 %     8.2 %

 

Insurance and claims per mile cost decreased to 11.2 cents per mile in the first quarter of 2021 compared to 19.5 cents per mile in the first quarter of 2020. This change is primarily a result of the occurrence and development of large claims in the 2020 period as well as decreased incident rates during the same 2021 period. 

 

The auto liability policy contains a feature whereby we are able to retroactively obtain a partial refund of the premium in exchange for taking on the liability for incidents that occurred during the period and releasing the insurers. This is referred to as "commuting" the policy or "policy commutation." In the second quarter of 2020, as well as in several past periods we have commuted the policy, which has lowered our insurance and claims expense. Effective April 2018, we entered into new auto liability policies with a three-year term. The policy includes a limit for a single loss of $9.0 million, an aggregate of $18.0 million for each policy year, and a $30.0 million aggregate for the 36 month term ended March 31, 2021. The policy includes a policy release premium refund or commutation option of up to $14.0 million, less any future amounts paid on claims by the insurer. A decision with respect to commutation of the policy has not yet been made. Management cannot predict whether or not future claims or the development of existing claims will justify a commutation of either policy period, and accordingly, no related amounts were recorded at March 31, 2021.

 

Our auto liability (personal injury and property damage), cargo, and general liability insurance programs include significant self-insured retention amounts. We are also self-insured for physical damage to our equipment. Because of these significant self-insured exposures, insurance and claims expense may fluctuate significantly from period-to-period. Any increase in frequency or severity of claims, or any increases to then-existing reserves, could adversely affect our financial condition and results of operations. We periodically evaluate strategies to efficiently reduce our insurance and claims expense. For the current policy period (April 1, 2018 to March 31, 2021), the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were estimated to be fully eroded based on claims expense accruals. We have replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024. Due to the erosion of the $9.0 million in excess of $1.0 million layer, any adverse developments in claims filed between April 1, 2018 and March 31, 2021, could result in additional expense accruals. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations.

 

In addition, in future periods, insurance and claims costs may be more volatile depending on our future accident experience, which could have a material adverse effect on our business, financial condition, and results of operations.

 

Page 30

 

Communications and utilities

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Communications and utilities

  $ 1,247     $ 1,569  

% of total revenue

    0.6 %     0.7 %

% of freight revenue

    0.6 %     0.8 %

 

For the periods presented, the changes in communications and utilities were not significant as either a percentage of total revenue or freight revenue.

 

General supplies and expenses

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

General supplies and expenses

  $ 8,183     $ 8,359  

% of total revenue

    3.7 %     4.0 %

% of freight revenue

    4.1 %     4.4 %

 

 

The decreases in general supplies and expenses primarily relate to decreases in travel expenses due to ongoing travel limitations brought on by the COVID-19 pandemic, offset by increases in legal fees related to ongoing litigation and contract negotiations. For the remainder of 2021, we expect the changes in general supplies and expenses to increase year-over-year due to ongoing litigation and costs associated with contract renegotiations, as well as the increase in travel related costs compared to the prior year.
 
Page 31

 

Depreciation and amortization

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Depreciation and amortization

  $ 14,087     $ 18,183  

% of total revenue

    6.4 %     8.6 %

% of freight revenue

    7.0 %     9.6 %

 

Depreciation and amortization consists primarily of depreciation of tractors, trailers, and other capital assets, as well as amortization of intangible assets.

 

Depreciation decreased $4.6 million to $12.9 million for the three months ended March 31, 2021, respectively, compared to $17.5 million in the same 2020 period. The decreases in depreciation expense are due to the mix change in the overall business that reduced total tractor count and increased utilization, along with reductions in terminals and other capital assets. Amortization of intangible assets was $1.2 million for the three months ended March 31, 2021 and $0.7 million for the same 2020 quarter. The increase is a result of the revised remaining useful life of the Landair trade name to 15 months as of June 30, 2020 and the termination of the non-compete agreement with a former Landair executive as a result of management changes, a change in the branding of the organization, and the expected use of the Landair trade name.

 

For the remainder of 2021, we expect our average operational fleet size to remain relatively flat at approximately 2,550 tractors.

 

Gain on disposition of property and equipment, net

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Gain on disposition of property and equipment, net

  $ (923 )   $ (1,524 )

% of total revenue

    (0.4 %)     (0.7 %)

% of freight revenue

    (0.5 %)     (0.8 %)

 

The decrease in gain on disposition of property and equipment, net are primarily the result of the timing of the trade cycle of our equipment. 

 

Page 32

 

Interest expense, net

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Interest expense, net

  $ 743     $ 1,899  

% of total revenue

    0.3 %     0.9 %

% of freight revenue

    0.4 %     1.0 %

 

For the periods presented, the changes in interest expense, net were not significant as either a percentage of total revenue or freight revenue.

 

This line item will fluctuate based on our decision with respect to purchasing revenue equipment with balance sheet debt versus operating leases as well as our ability to continue to generate profitable results and reduce our leverage. We expect this line item to increase slightly due to the $35.6 million draw on the Draw Note related to the indemnification call by Triumph.

 

Income from equity method investment

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

(Income) Loss from equity method investment

  $ (2,960 )   $ 735  

 

We have accounted for our investment in TEL using the equity method of accounting and thus our financial results include our proportionate share of TEL's net income or loss. The increase in TEL's contributions to our results for the three months ended March 31, 2021 is the result of constricted used equipment capacity in the transportation market. We expect the impact on our earnings for the remaining quarters of 2021 to be consistent with the first quarter.

 

Income tax expense (benefit)

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Income tax expense (benefit)

  $ 4,145     $ (1,004 )

% of total revenue

    1.9 %     (0.5 %)

% of freight revenue

    2.1 %     (0.5 %)

 

The changes in income tax expense (benefit) were primarily related to the $16.8 million increase in pre-tax income in the three months ended March 31, 2021, compared to the same 2020 period, resulting from the increases in operating income,  earnings on investment in TEL, and income from discontinued operations.

 

The effective tax rate is different from the expected combined tax rate due primarily to permanent differences related to our per diem pay structure for drivers. Due to the partial nondeductible effect of the per diem payments, our tax rate will fluctuate in future periods as income fluctuates. We are currently estimating our 2021 effective income tax rate to be approximately 28.7%.

 

Page 33

 
 

RESULTS OF SEGMENT OPERATIONS

 

We have four reportable segments, Expedited, Dedicated, Managed Freight, and Warehousing, each as described above.

 

COMPARISON OF three months ended March 31, 2021 TO three months ended March 31, 2020

 

The following table summarizes financial and operating data by reportable segment:

 

(in thousands)

 

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Revenues:

               

Expedited

  $ 78,481     $ 86,161  

Dedicated

    75,446       81,788  

Managed Freight

    51,397       30,737  

Warehousing

    15,565       12,127  

Total revenues

  $ 220,889     $ 210,813  
                 

Operating Income (Loss):

               

Expedited

  $ 6,237     $ (1,757 )

Dedicated

    (1,770 )     (1,325 )

Managed Freight

    4,887       654  

Warehousing

    1,155       975  

Total operating income

  $ 10,509     $ (1,453 )

 

The decrease in Expedited revenue relates to a 425 (or 32.4%) average tractor decrease related to the exit of the solo-refrigerated business in the second quarter of 2020 partially offset by an increase in average freight revenue per tractor per week of 34.6% compared to the 2020 quarter. The increase in average freight revenue per tractor per week for the quarter ended March 31, 2021 is the result of a 32.6% increase in average miles per unit and a slight 0.8 cents per mile (or 0.4%) increase in average rate per total mile compared to the 2020 quarter. Expedited team-driven tractors averaged 875 tractors in the first quarter of 2021, an increase of approximately 3.2% from the average of 848 tractors in the first quarter of 2020.

 

The decrease in Dedicated revenue relates to a 42 (or 2.5%) average tractor decrease as a result of not renewing underperforming contracts and a $1.0 million decrease in fuel surcharge revenue. Average freight revenue per tractor per week decreased slightly compared to the 2020 quarter as the result of a 12.4% decrease in average miles per unit partially offset by an 14.8 cents per mile (or 8.2% increase) in average rate per total mile compared to the 2020 quarter. 

 

Managed Freight total revenue increased as a result of a robust freight market and executing various spot rate opportunities in the quarter, as well as handling overflow freight from both Expedited and Dedicated truckload operations. 

 

Warehousing total revenue increased as a result of new customer business that began operations during the third quarter of 2020.

 

In addition to the changes in revenue described above, the change in operating income resulted from a $15.7 and $5.9 million decrease in Expedited and Dedicated operating expenses, respectively, partially offset by a $16.4 million and $3.3 million increase in Managed Freight and Warehousing operating expenses, respectively. The decrease in Dedicated and Expedited operating expenses is primarily the result of decreased insurance and claims expense and a 32.4% and 2.5% average operating fleet reduction, respectively, partially offset by higher variable costs associated with driver pay increases and a greater concentration of team driven units in the Expedited fleet. The downsizing of our terminal network and solo-driver fleet also contributed to this reduction. The increase in Managed Freight operating expenses is the result of increased revenue driving an increase in variable expenses, primarily purchased transportation. The increase for Warehousing was primarily driven by the new customer business that began operations during the third quarter of 2020.

 

Page 34

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our business requires significant capital investments over the short-term and the long-term. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operations, long-term operating leases, finance leases, secured installment notes with finance companies, and proceeds from the sale of our used revenue equipment. Going forward, we expect revenue equipment acquisitions through purchases and finance leases to increase as a percentage of our fleet as we decrease our use of operating leases. Further, we expect to increase our capital allocation toward Dedicated and Managed Freight reportable segments to become the go-to partner for our customers’ most critical transportation and logistics needs. We had working capital (total current assets less total current liabilities) of $20.3 million and $14.4 million at March 31, 2021 and December 31, 2020, respectively. Our working capital on any particular day can vary significantly due to the timing of collections and cash disbursements. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs, and we do not expect to experience material liquidity constraints in the foreseeable future.

 

With an average fleet age of 1.8 years at March 31, 2021, we believe we have flexibility to manage our fleet, and we plan to regularly evaluate our tractor replacement cycle, new tractor purchase requirements, and purchase options. If we were to grow our independent contractor fleet, our capital requirements would be reduced.

 

As of March 31, 2021 and December 31, 2020 we had $128.1 million and $110.4 million in long-term debt and lease obligations, respectively, consisting of the following:

 

 

$10.5 million and $15.0 million outstanding borrowings under the Credit Facility, respectively;
     
  $35.6 million and no outstanding borrowings under the Draw Note, respectively;
     
  $9.4 million and $17.8 million in revenue equipment installment notes, respectively;
     
  $22.4 million and $22.7 million in real estate notes, respectively;
     
  No deferred loan costs (which reduce long-term debt) as of March 31, 2021 and $0.1 million as of December 31, 2020;
     
  $15.8 million and $32.0 million of the principal portion of financing lease obligations, respectively; and
     
  $34.4 million and $54.8 million of the operating lease obligations, respectively.

 

The decrease in our revenue equipment installment notes and financing lease obligations was primarily due to a strategic decision to reduce our debt and lease obligations through the first quarter of 2021. The decrease in operating lease obligations was primarily due to the termination of a property lease related to our Managed Freight segment and the amortization of the operating lease liability during 2020.

 

As of March 31, 2021, we had $10.5 million of borrowings outstanding, undrawn letters of credit outstanding of approximately $29.7 million, and available borrowing capacity of $69.8 million under the Credit Facility. Additionally, we had $9.6 million of remaining availability of a $45.0 million Draw Note from Triumph which is available solely to fund any indemnification owed to Triumph in relation to the TFS Settlement.  Fluctuations in the outstanding balance and related availability under our Credit Facility are driven primarily by cash flows from operations and the timing and nature of property and equipment additions that are not funded through notes payable, as well as the nature and timing of collection of accounts receivable, payments of accrued expenses, and receipt of proceeds from disposals of property and equipment. Refer to Note 7, “Debt” of the accompanying condensed consolidated financial statements for further information about material debt agreements.

 

Our net capital expenditures for the three months ended March 31, 2021 totaled $10.0 million as compared to $16.5 million of expenditures for the prior year period. In the first quarter of 2021, we took delivery of approximately 6 new tractors and 75 new trailers, while disposing of approximately 82 used tractors and 189 used trailers. Our current fleet plan for fiscal 2021 includes the delivery of an additional 284 new company replacement tractors and no additional new trailer deliveries. For the remainder of 2021, we expect our average operational fleet size to remain relatively flat with the first quarter of 2021 at approximately 2,550 tractors. Net gains on disposal of equipment and real estate in the first quarter of 2021 were $0.9 compared to $1.5 million in the prior-year quarter.

 

We believe we have sufficient liquidity to satisfy our cash needs, however we continue to evaluate and act, as necessary, to maintain sufficient liquidity to ensure our ability to operate during these unprecedented times. The extent to which COVID-19 could impact our operations, financial condition, liquidity, results of operations, and cash flows is highly uncertain and will depend on future developments. We will continue to evaluate the nature and extent of the potential short-term and long-term impacts to our business.

 

Page 35

 

Cash Flows

 

Net cash flows provided by operating activities increased to $9.6 million for the three-month period ended March 31, 2021, compared to net cash flows used by operating activities of $3.5 million for the same 2020 period, primarily due to a $13.3 million increase in net income, as well as, funding receivables of our discontinued Factoring reportable segment in the prior year period, partially offset by changes in the timing and amount of payments on insurance claims. 

 

Net cash flows provided by investing activities were $9.9 million for the three-month period ended March 31, 2021, compared to $16.5 million used in the same 2020 period. The change in net cash flows used by investing activities was primarily the result of the timing of our trade cycle whereby we took delivery of approximately six new company tractors and disposed of approximately 82 used tractors in the 2021 period compared to delivery and disposal of approximately 250 and 375 tractors, respectively in the same 2020 period.

 

Net cash flows used by financing activities were approximately $23.1 million for the three-months ended March 31, 2021, compared to $16.1 million provided in the same 2020 period. The change in net cash flows provided by financing activities was primarily a function of net proceeds in the 2020 quarter and net repayments in the 2021 quarter relating to both notes payable and under our Credit Facility.

 

On February 10, 2020, our Board approved the repurchase of up to $20.0 million worth of the Company's Class A common stock. The program was suspended on March 26, 2020 with approximately $2.5 million remaining authorized.

 

On January 25, 2021, our Board approved the repurchase of up to $40.0 million worth of the Company's outstanding Class A common stock. There were 0.5 million and 1.4 million shares repurchased in the open market for $8.1 million and $17.5 million during the three-months ended March 31, 2021 and 2020, respectively. The Company has the ability to repurchase up to $31.9 million worth of the Company’s outstanding Class A common stock under the current stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors.

 

Going forward, the disposition of our Factoring reportable segment is expected to continue to improve our cash flows used by financing activities. However, on an ongoing basis, our cash flows may fluctuate depending on capital expenditures, future stock repurchases, strategic investments or divestitures, any indemnification calls related to the TFS Settlement, and the extent of future income tax obligations and refunds.

 

Page 36

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. There have been no material changes to our most critical accounting policies and estimates during the three months ended March 31, 2021, compared to those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2020 Form 10-K, as amended, other than those discussed above.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to a smaller reporting company.

 

Page 37

 

 

ITEM 4.     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.

 

We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.

 

Changes in Internal Control Over Financial Reporting 

 

There have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Page 38

 
 

PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

From time-to-time, we are a party to ordinary, routine litigation arising in the ordinary course of business, most of which involves claims for personal injury and/or property damage incurred in connection with the transportation of freight.

 

Our subsidiary Covenant Transport, Inc. (“Covenant Transport”) is a defendant in a lawsuit filed on November 9, 2018, in the Superior Court of Los Angeles County, California. The lawsuit was filed on behalf of Richard Tabizon (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The complaint asserts that the time period covered by the lawsuit is from October 31, 2014 to the present and alleges claims for failure to properly pay drivers for rest breaks, failure to provide accurate itemized wage statements and/or reimbursement of business related expenses, unlawful deduction of wages, failure to pay proper minimum wage and overtime wages, failure to provide all wages due at termination, and other related wage and hour claims under the California Labor Code. Since the original filing date, the case has been removed from the Los Angeles Superior Court to the U.S. District Court in the Central District of California and subsequently the case was transferred to the U.S. District Court in the Eastern District of Tennessee where the case is now pending. Subsequent to March 31, 2021, this lawsuit was settled at mediation for an immaterial amount, pending court approval. Our accruals related to this claim as of March 31, 2021 were sufficient to cover this settlement.

 

On February, 28 2019, Covenant Transport was named in a separate (but related) lawsuit filed in the Superior Court of Los Angeles County, California requesting civil penalties under the California Private Attorneys’ General Act for the same underlying wage and hour claims at issue in the putative class action case noted above. On August 1, 2019, the Los Angeles Superior Court entered an order staying the action pending completion of the earlier-filed action that is pending in the United States District Court for the Eastern District of Tennessee. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of March 31, 2021.

 

On August 2, 2018, Curtis Markson, et al. (collectively, “Markson”), filed a putative class action case in United States District Court, Central District of California generically claiming that five (5) specified trucking companies (including our subsidiary Southern Refrigerated Transport, Inc.) entered into a "no poaching conspiracy" in which they agreed not to solicit or hire employees in California who were "under contract" with a fellow defendant. The allegations center around new drivers in California who received their commercial driver's license through driving schools associated with, or paid for by, one of the named defendants, in exchange for agreeing to drive for that defendant carrier for a specified amount of time (typically 8-10 months). Over the ensuing 18 – 24 months, the Plaintiffs added more trucking companies as co-defendants in the lawsuit, including Covenant Transport on April 23, 2020. The lawsuit claims that the named defendants sent letters to one another, providing notice of "under contract" status, if these new California drivers were hired by another defendant carrier prior to the driver completing their contractual obligations. Plaintiffs contend that these notifications evidence a collusive agreement by the named defendants to restrain competition among trucking companies in California and suppress wages. Southern Refrigerated Transport, Inc. and Covenant Transport, Inc. are vigorously defending themselves against these claims. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of March 31, 2021. 

 

On February 11, 2021, a lawsuit was filed against Covenant Transport on behalf of Wesley Maas (a California resident and former driver) who is seeking to have the lawsuit certified as a class action. The lawsuit was filed in the Superior Court of San Bernardino County, California. The Complaint alleges claims for failure to pay all lawful wages, failure to provide lawful meal and rest periods or compensation in lieu thereof, failure to timely pay wages, failure to comply with itemized wage statement provisions, failure to indemnify for expenditures, and violations of California Labor Code and unfair competition laws. Covenant Transport intends to vigorously defend itself in this matter. We do not currently have enough information to make a reasonable estimate as to the likelihood, or amount of a loss, or a range of reasonably possible losses as a result of this claim, as such there have been no related accruals recorded as of March 31, 2021. 

 

Our insurance program includes multi-year policies with specific insurance limits that may be eroded over the course of the policy term. If that occurs, we will be operating with less liability coverage insurance at various levels of our insurance tower. For the current policy period (April 1, 2018 to March 31, 2021), the aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million were estimated to be fully eroded based on claims expense accruals. We have replaced our $9.0 million in excess of $1.0 million layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024. Due to the erosion of the $9.0 million in excess of $1.0 million layer, any adverse developments in claims filed between April 1, 2018 and March 31, 2021, could result in additional expense accruals. Due to these developments, we may experience additional expense accruals, increased insurance and claims expenses, and greater volatility in our insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. 

 

Based on our present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, discussed above, taking into account existing reserves, is not likely to have a materially adverse effect on our condensed consolidated financial statements, however, any future liability claims would impact this analysis.

 

 

Page 39

 

ITEM 1A.

RISK FACTORS

 

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Form 10-K for the year ended December 31, 2020, as amended, in the section entitled "Item 1A. Risk Factors," describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects.

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The table below sets forth information with respect to purchases of our Class A common stock made by us during the quarter ended March 31, 2021:

 

 

Period

 

(a) Total Number of Shares Purchased

   

(b) Average Price Paid per Share

   

(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)

   

(d) Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)

 

January 1-31, 2021

    34,600     $ 15.15       34,600       39,475,076  

February 1-28, 2021

    319,871     $ 17.58       319,871       33,941,979  

March 1-31, 2021

    103,856     $ 19.95       103,856       31,872,438  

Total

    458,327               458,327       31,872,438  

 

(1)

On January 25, 2021, our Board approved the repurchase of up to $40.0 million worth of the Company's outstanding Class A common stock. There were 0.5 million and 1.4 million shares repurchased in the open market for $8.1 million and $17.5 million during the three-months ended March 31, 2021 and 2020, respectively. The Company has the ability to repurchase up to $31.9 million worth of the Company’s outstanding Class A common stock under the current stock repurchase program as circumstances warrant based on market conditions, cash flow requirements, securities law limitations, and other factors.

 

The payment of cash dividends is currently limited by our financing arrangements, including certain covenants under our Credit Facility.
 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

 

Not applicable.

 

Page 40

 
 

 

ITEM 6.       EXHIBITS

 

Exhibit

Number

 

Reference

 

Description

3.1

(1)

Third Amended and Restated Articles of Incorporation

3.2

(2)

Fifth Amended and Restated Bylaws

4.1

(1)

Third Amended and Restated Articles of Incorporation

4.2

(2)

Fifth Amended and Restated Bylaws

10.1 *# First Amended and Restated Executive Severance Agreement with John Tweed
10.2 *# Consulting Agreement with John Tweed

31.1

#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Principal Executive Officer

31.2

#

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Principal Financial Officer

32.1

##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer

32.2

##

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Principal Financial Officer

101.INS

  Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104   Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)

References:

   

(1)

Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K, filed July 2, 2020.

(2)

Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K, filed July 2, 2020.
(3) Incorporated by reference to Appendix A to the Company's Schedule 14A, filed June 8, 2020.

#

Filed herewith.

##

Furnished herewith.

* Management contract or compensatory plan or arrangement.

 

Page 41

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

COVENANT LOGISTICS GROUP, INC.

   
   

Date: May 10, 2021

By:

/s/ Joey B. Hogan

   

Joey B. Hogan

   

President and Principal Financial Officer in his capacity as such and as a duly authorized officer on behalf of the issuer

 

 

Page 42

 

Exhibit 10.1

FIRST AMENDED AND RESTATED

 

EXECUTIVE SEVERANCE AGREEMENT

 

THIS FIRST AMENDED AND RESTATED EXECUTIVE SEVERANCE AGREEMENT (“Agreement”) is made and entered into by and between Landair Transport, Inc. (“Company”) and John A. Tweed (“Executive”). Once signed by both parties, this Agreement will be deemed effective as of January 25, 2021 (Effective Date”). This Agreement amends, replaces and supersedes that certain Executive Severance Agreement by and between the parties dated June 5, 2020 (the “Original Agreement”).

 

1.    Employment.  Executive is currently employed by the Company. Executive has previously entered into that certain Confidentiality, Non-Disclosure and Restrictive Covenants Agreements (the “NDA”) with the Company (or an affiliate). In the event of a conflict between the terms set forth herein and those set forth in Executive’s NDA, the terms set forth herein shall control.

 

2.    Term.  This Agreement shall commence on the Effective Date and end on the date that Executive’s employment is terminated under this Agreement or the close of business on July 3, 2021, whichever occurs first (the “Expiration Date”) (collectively the “2021 Term). Executive shall be an at-will employee whose employment may be terminated by either Executive or the Company at any time, for any reason, with or without Cause, subject to the terms of this Agreement.

 

3.    Compensation. As compensation for Executive’s services during the 2021 Term, the Company shall pay to Executive a base annualized salary of $512,000 (“Annual Base Salary”), which salary shall be paid in conformity with the Company’s pay practices generally applicable to Company executives. Executive shall also receive his bonus earned for Fiscal Year 2020. This bonus shall be paid promptly to Executive after approval by the Compensation Committee of Parent and in conformity with the Company’s bonus compensation pay practices generally applicable to Company executives. Executive shall be entitled to participate in all employee benefit plans and programs to the same extent generally available to similarly situated Company executives in accordance with the terms of those plans and programs. Executive further agrees that Executive’s employment can be transferred within the Company Group by Parent without effecting the rights and obligations set forth in this Agreement, provided a Change in Control is not effected in connection with such transfer.

 

4.    Equity. The remaining 3,750 shares of stock awarded to the Executive at the date of the Landair sale pursuant to the July 27, 2018 award, and the 50,000 performance shares awarded to the Executive on June 5, 2020 that were earned will continue to vest in accordance with their terms and be fully vested by July 3, 2021, subject to forfeiture as provided in the applicable award documents.

 

Contemporaneously with signing this Agreement the Executive will be awarded 50,000 time-based restricted shares which will fully vest on the first anniversary of the grant, or an earlier Change-in-Control of the Company. No other vesting requirements will apply. For the avoidance of doubt death, disability, or termination of this agreement will not interfere with continued vesting of these restricted shares.

 

5.    Termination.

 

5.1    Termination Procedures.

 

(a)    During the term of this Agreement, any purported termination of the Executive’s employment (other than by reason of death or on July 3, 2021) shall be communicated by a Notice of Termination from one party hereto to the other party hereto in accordance with this Section 5.1(a). For purposes of this Agreement, a “Notice of Termination” shall mean, (i) in the case of a termination of the Executive’s employment by the Company without Cause, a written notice of termination, (ii) in the case of a termination of the Executive’s employment by the Company for Cause, a written notice of termination, which will indicate the conduct set forth in the definition of Cause set forth herein that the Executive was found to have violated, (iii) in the case of a termination of the Executive’s employment by the Company due to Executive’s Disability, a written notice of termination, and (iv) in the case of the Executive terminating his or her employment with the Company, a written notice of termination; provided, that a Notice of Termination by the Executive in the case of a Constructive Termination shall specify in reasonable detail the event or circumstance constituting the Constructive Termination under the definition of Constructive Termination set forth herein, and such notice of Constructive Termination must be provided by the Executive to the Company within ninety (90) days of the initial existence of the condition giving rise to the Constructive Termination. Notwithstanding anything to the contrary contained herein, if the Executive engages in conduct that the Company or Parent reasonably believes to be imminently harmful to the Company, Parent, or any subsidiary or affiliate of the Company or Parent (collectively, the “Company Group”), the Company may terminate the Executive’s employment by giving the Executive a verbal Notice of Termination, which may be effective immediately, and which shall be effective for purposes of this Agreement.

 

1

 

(b)    Date of Termination” with respect to any purported termination of the Executive’s employment during the term of this Agreement shall mean July 3, 2021, provided that if Executive is terminated prior to July 3, 2021, then Date of Termination shall mean:

 

(i)    if Executive’s employment is terminated by the Company for Disability, the date specified in the Notice of Termination (provided that the Executive shall not have returned to the full-time performance of the Executive’s duties before the date set forth in the Notice of Termination);

 

(ii)    if Executive’s employment is terminated because of Executive’s death, immediately upon the death of Executive;

 

(iii)    if Executive’s employment is terminated by the Company for any reason other than Executive’s death or Disability, the date specified in the Notice of Termination; and

 

(iv)    in the case of termination by the Executive (including a Constructive Termination), thirty (30) days after the date such Notice of Termination is given; provided, in the case of a Constructive Termination, the Notice of Termination contemplated by Paragraph (a) of this Section 5.1 shall be deemed cancelled, void and of no further force and effect, and no payment obligation of the Company shall arise therefrom, if the Company rescinds or otherwise eliminates or reverses the action or event that would otherwise constitute grounds for Constructive Termination, and so notifies the Executive in writing within thirty (30) days of its receipt of the notice of Constructive Termination.

 

 

For purposes of this Agreement, the term “

Disability

” means a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six (6) months, where such impairment causes the Executive to be unable to perform the duties of his or her position of employment or any substantially similar position of employment.

 

 

5.2    Payments Upon Termination.

 

(a)    If, Executive’s employment is terminated for any reason, including termination on July 3, 2021, Executive shall receive the following (“Standard Pay”): (i) the portion of Executive’s then current Annual Base Salary accrued through Executive’s date of termination (pro-rated if applicable); (ii) any vested (as determined by Parent’s compensation committee with respect to performance-vested awards and at the date of vesting with respect to time-vested awards) bonus payments, stock options or restricted stock to which Executive is entitled as of the date of termination pursuant to this Agreement or any plan in which Executive is then participating, provided the payment thereof is not contingent or conditional on Executive’s continued employment with the Company or the satisfaction of any other condition (including, without limitation, performance criteria) which has not been satisfied; and (iii) any payments for reimbursement of expenses, which are due, accrued or payable as of the date of Executive’s termination in accordance with the Company’s expense reimbursement policy.

 

2

 

(b)    If Executive’s employment is terminated by the Company without Cause, prior to July 3, 2021 at any time other than between execution of a definitive agreement in contemplation of a Change in Control (as defined below) and continuing through twenty-four (24) months following a Change in Control, and other than as a result of Executive’s death or Disability, then the Company shall pay to Executive, in addition to the Standard Pay, the following payments (the “Continuation Severance Payments”), subject to Section 6 below: (i) Executive’s then-current Annual Base Salary for a twenty-four (24) month period, in the form of salary continuation payments, plus (ii) any management incentive cash bonus payment that Parent’s compensation committee determined was attained under the terms of such cash bonus plan (and would have been paid to Executive for the year in which Executive’s employment is terminated) except (A) such cash bonus payment, if any, shall be prorated through Executive’s date of separation, and (B) any performance criteria applicable to such cash bonus will be deemed to have been achieved at the “target” level set forth in such cash bonus plan (regardless of the level actually attained), all of which shall be payable periodically in accordance with the Company’s normal payroll procedures, practices and policies. Additionally, the Company will pay the premiums for coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) for Executive and Executive’s eligible dependents, if any, at the rates and eligibility then in effect, subject to any subsequent changes in rates that are generally applicable to the Company’s active employees (the “COBRA Coverage”), until the earliest of (A) a period of twenty-four (24) months from the date of Executive’s termination of employment, (B) the date upon which Executive (and Executive’s eligible dependents, as applicable) becomes covered under similar plans, or (C) the date upon which Executive ceases to be eligible for coverage under COBRA. Executive’s receipt of COBRA Coverage is subject to Executive electing COBRA continuation coverage within the time period prescribed pursuant to COBRA for Executive and Executive’s eligible dependents, if any.

 

(c)    If, prior to July 3, 2021, either (i) a Constructive Termination of Executive occurs while Executive remains employed by the Company or its successor, or (ii) if Executive’s employment is terminated by the Company without Cause, in each case, between execution of a definitive agreement in contemplation of a Change in Control and continuing through twenty-four (24) months following a Change in Control, then the Company shall pay to Executive, in addition to the Standard Pay, the following amounts (the “CIC Severance Payments”) (the Continuation Severance Payments and the CIC Severance Payments, each individually a “Severance Payment” and together, the “Severance Payments”), subject to Section 6 below: a lump sum amount equal to: (i) three (3) times the sum of Executive’s Annual Base Salary, plus (ii) any management incentive cash bonus payment that Executive would have been eligible for in the year in which Executive’s employment is terminated (regardless of whether or not the criteria for such cash bonus payment was actually met), provided that any performance criteria applicable to such cash bonus will be deemed to have been achieved at the “target” level (regardless of the level actually attained or whether or not any level was actually attained). Additionally, the Company will pay for Executive’s COBRA Coverage until the earliest of (A) a period of thirty-six (36) months from the date of Executive’s termination of employment, (B) the date upon which Executive (and Executive’s eligible dependents, as applicable) becomes covered under similar plans, or (C) the date upon which Executive ceases to be eligible for coverage under COBRA. Executive’s receipt of COBRA Coverage is subject to Executive electing COBRA continuation coverage within the time period prescribed pursuant to COBRA for Executive and Executive’s eligible dependents, if any. For the avoidance of doubt, and notwithstanding anything contained herein to the contrary, (i) if Executive receives CIC Severance Payments (or any portion thereof) under this Section 5.2(c), then Executive shall not receive any Continuation Severance Payments (or any portion thereof) under Section 5.2(b) above and (ii) if Executive is terminated on or after July 3, 2021, he will not be entitled to receive any CIC Severance Payments (or any portion thereof) under this Section 5.2(c) or any Continuation Severance Payments (or any portion thereof) under Section 5.2(b).

 

(d)    For the avoidance of doubt, a termination of Executive due to Executive’s death or Disability or on or after July 3, 2021 shall not be deemed a termination of Executive without Cause, and in such event Executive will only be entitled to receive the Standard Pay.

 

3

 

(e)    The Company intends that all payments and benefits provided under this Agreement or otherwise are exempt from, or comply with, the requirements of Section 409A of the Internal Revenue Code of 1986 (the “Code”) and any guidance promulgated under Section 409A of the Code (collectively, “Section 409A”) so that none of the payments or benefits will be subject to the additional tax imposed under Section 409A, and any ambiguities in this Agreement will be interpreted in accordance with this intent. No payment or benefits to be paid to Executive (including settlement of Company equity awards that constitute deferred compensation under Section 409A), if any, under this Agreement or otherwise, when considered together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A (together, the “Deferred Payments”) will be paid or otherwise provided until Executive has a “separation from service” within the meaning of Section 409A. If, at the time of Executive’s termination of employment, Executive is a “specified employee” within the meaning of Section 409A, then the payment of the Deferred Payments will be delayed to the extent necessary to avoid the imposition of the additional tax imposed under Section 409A, which generally means that Executive will receive payment on the first payroll date that occurs on or after the date that is 6 months and 1 day following Executive’s termination of employment. The Company reserves the right to amend this Agreement as it considers necessary or advisable, in its sole discretion and without the consent of Executive or any other individual, to comply with any provision required to avoid the imposition of the additional tax imposed under Section 409A or to otherwise avoid income recognition under Section 409A prior to the actual payment of any benefits or imposition of any additional tax. Each payment, installment, and benefit payable under this Agreement is intended to constitute a separate payment for purposes of U.S. Treasury Regulation Section 1.409A-2(b)(2). In no event will the Company or any member of the Company Group reimburse, indemnify, or hold harmless Executive for any taxes, penalties and interest that may be imposed, or other costs that may be incurred, as a result of Section 409A.

 

6.    Severance Payment Conditions. As a condition to the receipt of any and all Severance Payments or any other payment benefits described in this Agreement, in addition to any other conditions set forth herein, Executive shall:

 

(a)    execute and comply with the terms of a general release of all claims (the “General Release”) against the Company Group and their affiliates and representatives, in the form attached hereto as Exhibit B, as updated by the Company for any change in laws. The General Release must be signed, and the period provided therein for revocation must have expired, not later than sixty days from the Date of Termination. Notwithstanding anything to the contrary contained herein, no Severance Payments or other benefits or payments required under this Agreement shall be paid until the General Release is signed and the revocation period has expired, and any amounts that would otherwise have been paid prior to such date shall be paid within a reasonable time after such date, without interest; and

 

(b)    fully perform and comply with all of Executive’s obligations hereunder, including, without limitation, Executive’s obligations under Section 7. In the event Executive breaches any of Executive’s obligations hereunder (including, without limitation, Executive’s obligations under Section 7), then, in addition to any other remedies to which the Company Group may be entitled as a result of such breach, the Company Group shall be immediately and automatically released from any obligation to make any further Severance Payments and, upon notice from the Company, Executive shall be required to immediately reimburse the Company Group for any and all Severance Payments made to Executive by the Company.

 

7.    Restrictive Covenants. Executive acknowledges and agrees that during the course of Executive’s employment with any member of the Company Group, Executive will have access to confidential information which, if disclosed, would assist in competition against the Company Group and that Executive will generate goodwill for the Company Group during the course of Executive’s employment. Therefore, Executive hereby acknowledges and agrees that the following restrictive covenants (i) are necessary to protect the goodwill, confidential information, and other legitimate interests of the Company Group (including, without limitation, the preservation of trade secrets, valuable confidential and professional information, substantial relationships with prospective and existing customers and suppliers, and the goodwill that Executive conveyed to the Company Group under the Purchase Agreement (as defined below) and the transactions contemplated thereby), (ii) are reasonable and necessary to induce the Company to enter into this Agreement, and (iii) are of a scope (including, without limitation, the time period and geographic parameters) that is reasonably tailored, and not broader than necessary, to protect the legitimate business interests of the Company Group, and do not prevent or preclude Executive from earning a suitable livelihood. Executive hereby agrees to abide by the following restrictive covenants:

 

4

 

(a)    Non-Competition. During the period of Executive’s employment with any member of the Company Group and through the earlier of (y) July 4, 2021 and (z) the execution and effectiveness of a consulting agreement between Executive or an affiliate of Executive, on the one hand, and a member of the Company Group, on the other, Executive will not, and will not permit any other Person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion, directly or indirectly engage or invest in, own, manage, operate, finance, control or participate in the ownership, management, operation, financing or control of, be employed by, serve as an agent, officer, director or consultant to, be associated with or in any manner connected with, lend his, her, or its name or any similar name to, lend his, her or its credit or render services or advice to, any Competitive Business anywhere throughout the lower 48 contiguous United States, provided, however, that nothing herein will be deemed to prevent Executive from acquiring through market purchases and owning, solely as an investment, less than one percent (1%) in the aggregate of the equity securities of any entity that derives more than fifty percent (50%) of its gross revenues from the conduct of any Competitive Business, whose shares are registered under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are listed or admitted for trading on any United States national securities exchange or are quoted on any system of automated dissemination of quotations of securities prices in common use, so long as Executive is not directly or indirectly a member of any “control group” (within the meaning of the rules and regulations of the Securities and Exchange Commission) of any such issuer; and provided further, however, that nothing herein will be deemed to prevent Executive from acquiring through market purchases and owning, solely as an investment, any shares, units or other interest in a mutual fund, exchange-traded fund, unit investment trust, or similar investment vehicle whose holdings include investments in any Competitive Business or any entity involved in a Competitive Business.

 

(b)    Non-Solicitation. In consideration of Executive’s employment and the terms set forth in this Agreement, during the period of Executive’s employment with any member of the Company Group and through the earlier of (y) July 4, 2021 and (z) the execution and effectiveness of a consulting agreement between Executive or an affiliate of Executive, on the one hand, and a member of the Company Group, on the other, Executive will not, and will not permit any other Person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i)    whether on Executive’s own behalf or on behalf of another Person, provide or solicit to provide any Competitive Services to any Person that: (x) was at any time in the twelve (12) months prior to the Date of Termination a customer, shipper, carrier or other client of any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the Date of Termination or solicitation of Competitive Services, a customer, shipper, carrier or other client of any member of the Company Group;

 

5

 

(ii)    whether on Executive’s own behalf or on behalf of another Person, solicit to employ or engage or employ or otherwise engage as an employee, independent contractor, agent or otherwise, any Person who: (x) was at any time in the twelve (12) months prior to the Date of Termination an employee, independent contractor, or agent of, or was otherwise engaged with, any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the solicitation, employment, or engagement of such Person, an employee, independent contractor, or agent of, or was otherwise engaged with, any member of the Company Group, provided that (A) general advertising (including general internet advertising) not targeted at a particular employee or consultant or independent contractor (or group thereof) shall not be deemed a breach hereof, nor shall hiring or retaining any Person who responds to such a general advertisement not targeted at a particular employee or consultant or independent contractor (or group thereof), and (B) nothing in this Agreement shall prohibit Executive or any other Person from engaging any professional services firm or other third party advisor that provides consulting services to multiple clients.; or

 

(iii)    at any time interfere with any member of the Company Group’s relationship with any Person that: (x) was at any time in the twelve (12) months prior to the Date of Termination an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; or (y) to Executive’s knowledge, was at any time in the twelve (12) months prior to the interference an employee, contractor, supplier, agent, customer, shipper, carrier or other client of any member of the Company Group; including, without limitation, soliciting, encouraging, advising or influencing such Person(s) to discontinue or reduce the extent of such relationship.

 

(c)    Non-Disclosure. During the period of Executive’s employment with any member of the Company Group and for one (1) year after such employment is terminated, Executive will not, and will not permit any other Person controlling, controlled by or under common control, directly or indirectly, with Executive to, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i)    make, publish, communicate or take any action to disparage any member of the Company Group or any of their respective stockholders, directors, officers, employees, agents, products or services; or

 

(ii)    divulge, communicate, use to the detriment of any member of the Company Group, or for the benefit of any other Person(s), or misuse in any way, any confidential information or trade secrets pertaining to any member of the Company Group, except as required or compelled by law.

 

6

 

(d)    Reformation; Severability; Injunctive Relief. Executive expressly acknowledges and agrees that the restrictions contained herein are reasonable and no greater than necessary to protect the legitimate interests of the Company Group. However, if any covenant set forth in this Agreement (including, without limitation, this Section 6) is determined by any court to be unenforceable by reason of its extending for too great a period of time or over too great a geographic area, or by reason of its being too extensive in any other respect, such covenant shall be reformed and interpreted to extend only for the longest period of time and over the greatest geographic area, and to otherwise have the broadest application as shall be enforceable. The invalidity or unenforceability of any particular provision (or part thereof) of this Agreement (including, without limitation, this Section 6) shall not affect the other provisions hereof (or parts thereof), which shall continue in full force and effect. Without limiting the foregoing, the covenants contained herein shall be construed as separate covenants, covering their respective subject matters, with respect to each of the separate cities, counties and states, and each political subdivision thereof, within the lower 48 contiguous United States. Executive further acknowledges that any violation of this Agreement (including, without limitation, this Section 6) will result in irreparable injury to the Company Group, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such violation would not be reasonable or adequate compensation to Company Group for such a violation. Accordingly, Executive agrees that if Executive violates the provisions of this Agreement (including, without limitation, this Section 6), any member of the Company Group, in addition to all other remedies which may be available to it at law or in equity, shall be entitled to specific performance and injunctive relief, without posting bond or other security, and without the necessity of proving actual damages. Such relief will not be exclusive, but will be in addition to all other relief available to Company Group, at law and equity.

 

8.    Restricted Stock and Stock Options. This Agreement does not incorporate, supersede, or in any way affect Parent’s 2006 Omnibus Incentive Plan, as amended from time to time, or any restricted stock agreements or stock option grants, all of which are governed by separate documents prior to the date hereof.

 

9.    Limitation on Payments.

 

(a)    Reduction of Severance Payments. If any payment or benefit that Executive would receive from the Company or any member of the Company Group or any other party whether in connection with the provisions in this Agreement or otherwise (the “Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Payment will be equal to the Best Results Amount. The “Best Results Amount” will be either (x) the full amount of the Payment or (y) a lesser amount that would result in no portion of the Payment being subject to the Excise Tax, whichever of those amounts, taking into account the applicable federal, state and local employment taxes, income taxes and the Excise Tax, results in the Executive’s receipt, on an after-tax basis, of the greater amount. If a reduction in payments or benefits constituting parachute payments is necessary so that the Payment equals the Best Results Amount, reduction will occur in the following order: (A) reduction of cash payments in reverse chronological order (that is, the cash payment owed on the latest date following the occurrence of the event triggering the excise tax will be the first cash payment to be reduced); (B) cancellation of equity awards that were granted “contingent on a change in ownership or control” within the meaning of Section 280G of the Code in the reverse order of date of grant of the awards (that is, the most recently granted equity awards will be cancelled first); (C) reduction of the accelerated vesting of equity awards in the reverse order of date of grant of the awards (that is, the vesting of the most recently granted equity awards will be cancelled first); and (D) reduction of employee benefits in reverse chronological order (that is, the benefit owed on the latest date following the occurrence of the event triggering the excise tax will be the first benefit to be reduced). In no event will Executive have any discretion with respect to the ordering of Payment reductions. Executive will be solely responsible for the payment of all personal tax liability that is incurred as a result of the payments and benefits received under this Agreement, and Executive will not be reimbursed, indemnified, or held harmless by the Company or any member of the Company Group for any of those payments of personal tax liability.

 

(b)    Determination of Excise Tax Liability. Unless the Company and Executive otherwise agree in writing, all determinations required under this Section 8 shall be made by the Company or its advisors in good faith and in accordance with applicable law and such determinations shall be conclusive and binding on Executive for all purposes. For purposes of making the calculations required by this Section 8, the Company may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Executive will furnish to the Company such information and documents as the Company reasonably may request in order to make determinations under this Section 8.

 

7

 

10.    Other Provisions. Except as otherwise set forth or permitted herein, no provisions of this Agreement may be modified, waived, or discharged except by a written document signed by Executive and a duly authorized Company officer.The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, representatives, heirs and estates, as applicable. This Agreement shall not be assignable by Executive without the prior written consent of the Company. This Agreement shall be governed by the laws of the State of Tennessee. Any litigation or other dispute resolution proceeding may only be brought within Tennessee, and all parties to this Agreement consent to jurisdiction in Hamilton County.  It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision of this Agreement is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such provision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or if such provision cannot be so modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this Agreement; provided, however, that the legality, binding effect and enforceability of the remaining provisions of this Agreement, to the extent the economic benefits conferred upon the parties by virtue of this Agreement remain substantially unimpaired, shall not be affected or impaired in any manner, and any such invalidity, illegality or unenforceability with respect to such provision in such jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute the same instrument. Except for Executive’s NDA, all oral or written agreements or representations, express or implied, with respect to the subject matter of this Agreement are set forth herein. The parties expressly intend for the NDA to otherwise remain in full force and effect. Except as expressly provided herein, this Agreement supersedes all previous agreements, promises, representations, understandings and negotiations between the parties, whether written or oral, with respect to the subject matter hereof. Notwithstanding the foregoing or anything contained herein to the contrary, the parties agree that any restrictive covenants set forth in that certain purchase agreement dated July 3, 2018 by and among Covenant Logistics Group, Inc. (formerly known as Covenant Transportation Group, Inc.), Landair Holdings, Inc., Scott M. Niswonger and John A. Tweed, as may be amended from time-to-time, remain superseded. . This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between Executive and the Company, Executive shall not have any right to be retained in the employ of the Company. Notwithstanding the immediately preceding sentence or any other provision of this Agreement, any purported termination of Executive’s employment that is not effected in accordance with a Notice of Termination satisfying Section 5.1 shall not be effective for purposes of this Agreement. In the event a Severance Payment is triggered pursuant to the provisions of Section 5.2, the provisions of Section 5.2 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive may otherwise be entitled (including any contrary provisions in any written or oral employment agreement or arrangement Executive may have with any member of the Company Group), whether at law, tort or contract, in equity, or under this Agreement. Subject to Section 8, payments provided for hereunder will be subject to required withholding of federal, state and local income, excise, and employment-related taxes, without any gross-ups or similar payments made to Executive.

 

11.    Communications with Government Agencies. Notwithstanding anything contained herein or in the NDA to the contrary, nothing set forth herein or in the NDA shall limit Executive’s ability to communicate with the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (collectively, “Government Agencies”) or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company, or limit Executive’s right to receive an award for information provided to any Government Agencies.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties have executed and delivered, or have caused to be executed and delivered by their duly authorized representatives, this First Amended and Restated Executive Severance Agreement as of the Effective Date.

 

EXECUTIVE:

/s/ John A. Tweed                                    

John A. Tweed, individually

 

LANDAIR TRANSPORT, INC.

 

By: /s/ Joey B. Hogan                                    

Name: Joey B. Hogan

Title: Co-President/CAO

 

Acknowledged and Agreed:

COVENANT LOGISTICS GROUP, INC.

 

By: /s/ David Parker                                    

Name: David Parker

Title:CEO

 

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EXHIBIT A - DEFINED TERMS

 

 

“Cause” for termination by the Company of Executive’s employment shall mean (i) failure by Executive to perform the essential functions of Executive’s position with the Company, other than any failure resulting from Executive’s incapacity due to physical or mental Disability, it being understood that a reasonable, good faith attempt to perform but failure to do so will not be deemed a failure to perform essential functions; (ii) failure to comply with any lawful directive by the Board of Directors of the Company or the Parent (the “Board”), it being understood that a reasonable, good faith attempt to comply with such directive but failure to do so will not be deemed a failure to comply for purposes of this definition of “Cause”; (iii) a material violation by Executive of the corporate governance guidelines, code of ethics, insider trading policy, governance policy, or other policy of the Company or Parent; (iv) a breach of any fiduciary duty to any member of the Company Group; (v) misconduct in the course and scope of employment by Executive that is injurious to any member of the Company Group from a monetary or reputational standpoint in any material respect; (vi) any attempt to willfully obtain any personal profit from any transaction which is adverse to the interests of any member of the Company Group or in which any member of the Company Group has an interest or any act of fraud or embezzlement against any member of the Company Group or any of their respective customers or suppliers; (vii) a breach by Executive of any of the covenants contained in Section 6 of this Agreement in any material respect; (viii) the repeated use of alcohol or abuse of prescription drugs by Executive that interferes with Executive’s duties, the use of illegal drugs by Executive, or a violation by Executive of the drug and/or alcohol policies of the Company or Parent; (ix) violation of any applicable law, rule or regulation, including without limitation the Sarbanes-Oxley Act of 2002 or other federal or state securities law, rule, or regulation, in each case, that is injurious to any member of the Company Group from a monetary or reputational standpoint in any material respect; or (x) the conviction or plea of guilty or nolo contendere to a felony or a misdemeanor involving moral turpitude. With respect to subsections (i), (ii) and (iii) above, Executive shall be notified in writing (which includes, without limitation, e-mail) of any alleged failure, breach or violation, such notice shall specify in reasonable detail the facts and circumstances claimed to constitute Cause under subsections (i), (ii) or (iii) as applicable and, if such failure, breach, or violation is capable of being remedied or cured, the Executive shall be given at least fifteen (15) calendar days to remedy or cure any failure, breach or violation. For purposes of this definition following a Change in Control, the Board’s determination of “Cause” must be made in good faith and will be binding on Executive.

 

“Change in Control” means a change in control of the Parent of a nature that would be required to be reported in response to Item 5.01 of a Current Report on Form 8-K, pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without limitation, a Change in Control shall be deemed to have occurred at such time as any of the following occurs after the Effective Date:

 

(i)    Any “person” within the meaning of Section 3(a)(9) of the Exchange Act, and as modified and used in Section 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) of the Exchange Act (but excluding the Parent, any employee benefit plan sponsored or maintained by the Parent (including any trustee of such plan (acting as trustee) or other fiduciary holding securities under an employee benefit plan of the Company), and any underwriter temporarily holding securities pursuant to an offering of such securities) (“Person”), other than a Permitted Holder becomes the “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of fifty percent (50%) or more of the combined voting power of the outstanding securities of the Parent ordinarily having the right to vote in the election of directors; provided, however, that the following will not constitute a Change in Control: any acquisition by any corporation if, immediately following such acquisition, more than seventy-five percent (75%) of the outstanding securities of the acquiring corporation (or the parent thereof) ordinarily having the right to vote in the election of directors is beneficially owned by all or substantially all of those persons who, immediately prior to such acquisition, were the beneficial owners of the outstanding securities of the Parent ordinarily having the right to vote in the election of directors;

 

(ii)    Individuals who constitute the Board of Directors of the Parent on the Effective Date (the “Incumbent Board”) have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date, whose election or nomination for election by the Parent’s stockholders was approved by a vote of at least three-fourths (3/4) of the directors comprising the Incumbent Board, either by a specific vote or by approval of the proxy statement of the Parent in which such person is named as a nominee for director without objection to such nomination (other than an election or nomination of an individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of the Parent, including, without limitation, in connection with a “tender offer,” as such term is used in Section 14(d) of the Exchange Act), shall be, for purposes of the Agreement, considered as though such person were a member of the Incumbent Board;

 

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(iii)    Upon the consummation by the Parent of a reorganization, merger, or consolidation, other than one with respect to which all or substantially all of those persons who were the beneficial owners, immediately prior to such reorganization, merger, or consolidation, of outstanding securities of the Parent ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than seventy-five percent (75%) of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors;

 

(iv)    Upon the approval by the Parent’s stockholders of a complete liquidation and dissolution of the Parent or the sale or other disposition of all or substantially all of the assets of the Parent other than to a subsidiary of the Parent or to an entity controlled by a Permitted Holder; or

 

(v)    Upon the consummation of a transaction subject to Rule 13e-3 of the Exchange Act in which the Permitted Holders identified in romanette (iii) of the definition of Permitted Holder hereunder are the beneficial owners of more than fifty percent (50%) of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors.

 

“Competitive Business” means any business conducted by any member of the Company Group as of the date of Executive’s termination (including any business where strategic plans were in place as of the date of Executive’s termination for any member of the Company Group to engage in such business). For the avoidance of doubt, Competitive Business shall not be deemed to include (i) activities in respect of owned warehouses and the provision of public warehousing services in relation to those warehouses, (ii) activities normally associated with ownership, operation, management, control, and financing of tractor and/or trailer dealerships affiliated with original equipment manufacturers (“OEM”) (including without limitation the ownership that certain Landmark Navistar dealership in which Executive or Executive’s Affiliates formerly had ownership), whether through acquisition or start-up, and including in such activities new and used tractor and trailer sales and leasing that are consistent with OEM dealer activities and not in violation of Section 6(b) above, or (iii) the passive ownership of or investment in trailers or pass-through entities that own trailers and collection of rents therefrom without any material participation in the control, management, marketing, or operation of the leasing operations.

 

“Competitive Services” means those services provided in the furtherance of a Competitive Business.

 

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“Constructive Termination” means the occurrence of any of the following, without Executive’s express written consent, at any time within twenty-four (24) months following a Change in Control:

 

(i)    material diminution in the overall scope of Executive’s duties, authorities and/or responsibilities from those held by Executive immediately prior to the time of a Change in Control, it being understood that the fact that the Company is a subsidiary of a different public company or becomes a private company, and any diminution of duties in respect of no longer having public company related duties will not be considered a diminution;

 

(ii)    written requirement for geographic relocation of the Executive’s assigned principal business location to a location greater than fifty (50) miles from the place of the Executive’s principal business location immediately prior to the time of a Change in Control; or

 

(iii)    written notice of diminution by ten percent (10%) or more of Executive’s then-current annual base salary or target bonus in effect immediately prior to the time of a Change in Control.

 

“Parent” means Covenant Logistics Group, Inc.

 

“Permitted Holder” means: (i) the Parent or a subsidiary of the Parent, (ii) any employee benefit plan sponsored by the Parent or a subsidiary of the Parent, or (iii) David or Jacqueline Parker or their siblings, children, or grandchildren (“Family Members”) or a trust, corporation, partnership, limited partnership, limited liability company, or other such entity, so long as at least eighty percent (80%) of the beneficial interests of the entity are held by Mr. or Mrs. Parker and/or one or more Family Members, where such person(s) or entity acquired their Parent stock from Mr. or Mrs. Parker.

 

 

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EXHIBIT B GENERAL RELEASE

 

In exchange for the payments and benefits described in the agreement to which this release is attached (the “Agreement”), Executive, on his or her own behalf and on behalf of his or her heirs, executors, administrators, assigns and successors, does hereby covenant not to sue and acknowledges full and complete satisfaction of and hereby releases, absolves and discharges the Company, Parent, each affiliate or subsidiary of the Company or the Parent, and its and their successors and assigns, parents, subsidiaries and affiliates, past and present, as well as their trustees, directors, officers, agents, attorneys, insurers, stockholders and employees, past and present, and each of them (hereinafter collectively referred to as “Releasees”), with respect to and from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, debts, wages, vacation pay, expenses, attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which Executive now owns or holds or has at any time heretofore owned or held as against said Releasees, or any of them, arising out of or in any way connected with his or her employment or other relationships with the Company, Parent, or its or their affiliates, or his or her separation from any such employment or other relationships (collectively, “Released Claims”), including specifically, but without limiting the generality of the foregoing, any claim under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act of 1967, as amended by the Older Worker’s Benefit Protection Act (“ADEA”), the federal Family and Medical Leave Act, the Fair Labor Standards Act, the Equal Pay Act, the Employee Retirement Income Security Act of 1974, the Worker Adjustment and Retraining Notification Act, or any other employment related federal, state or local law, regulation or ordinance; provided, however, that the foregoing release will not include or affect (and the following are expressly excluded from any Released Claims): (i) Executive’s rights under the Agreement; (ii) Executive’s rights to file claims for workers’ compensation or unemployment insurance benefits, (iii) Executive’s regular and usual salary accrued prior to the Separation Date, accrued but unused vacation through the Separation Date, COBRA continuation coverage and life insurance conversion rights, if any, (iv) Executive’s rights to provide information, assist or participate in any investigation, proceedings, or litigation concerning any administrative claim with any government agency under any applicable law that protects such rights, or to file such a claim, or (v) Executive’s rights under any written contracts between the Executive or his or her affiliated entities and any member of the Company Group. This General Release does not (i) limit Executive’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”), (ii) limit Executive’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company, or (iii) limit Executive’s right to receive an award for information provided to any Government Agencies.

 

Executive acknowledges that the non-disparagement and confidentiality provisions contained in the Agreement infringe on Executive’s rights described in this release, and Executive agrees that he or she is aware of and has consented to such infringement. Furthermore, notwithstanding the foregoing release, Executive will continue to be entitled to all of his or her respective statutory and other rights to indemnification, including, without limitation, indemnification pursuant to the Company’s organizational documents, indemnification agreements, insurance policies or under applicable law to the same extent Executive would have had the right to be indemnified absent this release.

 

Executive acknowledges that he or she is waiving and releasing any rights he or she may have under the ADEA and that this waiver and release is knowing and voluntary. Executive and the Company agree that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date (as hereinafter defined) of the Agreement. Executive acknowledges that the consideration given for the Agreement is in addition to anything of value to which he was already entitled. Executive further acknowledges that he or she has been advised by this writing that:

 

(a)    He or she should consult with an attorney prior to executing the Agreement;

 

(b)    He or she has at least twenty-one (21) days within which to consider the Agreement;

 

(c)    He or she has seven (7) days following his or her execution of the Agreement to revoke the Agreement;

 

(d)    This Agreement will not be effective until the eighth day after Executive executes and does not revoke the Agreement (the “Effective Date”); and

 

 

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(e)    Nothing in the Agreement prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or costs from doing so, unless specifically authorized by federal law. Any revocation must be in writing and hand delivered to the Company by close of business on or before the seventh day from the date that Executive signs the Agreement. In the event that Executive exercises his or her right of revocation, neither Executive nor any member of the Company, Parent, or its or their affiliates will have any further rights or obligations under the Agreement.

 

It is the desire and intent of the parties that the provisions of this release be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision of this release is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such provision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or if such provision cannot be so modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this release; provided, however, that the legality, binding effect and enforceability of the remaining provisions of this release, to the extent the benefits conferred upon the parties by virtue of this release remain substantially unimpaired, shall not be affected or impaired in any manner, and any such invalidity, illegality or unenforceability with respect to such provision in such jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

Executive represents and warrants that he or she has no present knowledge of any injury, illness or disease to him or her that is or might be compensable as a workers’ compensation claim or similar claim for workplace injuries, illnesses or diseases.

 

Terms used herein and not otherwise defined will have the meanings set forth in the Agreement to which this Release was attached.

 

[Signature page follows]

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Intending to be legally bound, I have signed this General Release as of the date written below.

 

Signature: /s/ John A. Tweed                                             

John A. Tweed

 

Date Signed: 1-25-2021

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Exhibit 10.2

CONSULTING AGREEMENT

 

THIS CONSULTING AGREEMENT (the “Agreement”), to be executed on the 4th day of July, 2021 (the “Effective Date”) by and between Covenant Logistics Group, Inc., a Nevada corporation (the “Company”) and Team JAT, LLC (the “Consultant”).

 

WHEREAS, the Company desires to retain the services of the Consultant and the Consultant desires to perform certain services for the Company.

 

NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the parties hereto agree as follows:

 

1.    Services.

 

1.1    Unless otherwise agreed by Company, Consultant will provide the services under this Agreement through John Tweed. Consultant will report directly to David Parker, CEO of the Company, or in his absence, the officer or officers designated by the Board of Directors of the Company (the “Board”) and will provide periodic updates upon reasonable advance notice and at reasonable times if and when requested by the Board.

 

1.2    The scope of services to be provided by Consultant includes general management, operations, and sales advice and consulting applicable to the freight transportation and logistics business. Consultant agrees to provide such services to the Company or its affiliates, as determined by David Parker from time to time, and it is agreed that such services may include, without limitation:

 

 

a)

management leadership training and development;

 

 

b)

contract evaluation, negotiation, enforcement, and reporting;

 

 

c)

evaluating the required investments and expected returns associated with growing the warehousing business and making recommendations;

 

 

d)

sourcing and evaluating potential dedicated acquisitions;

 

 

e)

transitioning key customers and relationship management;

 

 

f)

assisting with monthly P&L reviews, tactical plans and gap analysis as it relates to the budget and overhead control; and

 

 

g)

performing such additional functions as David Parker shall direct that are within Consultant’s area of expertise.

 

1.3    Consultant shall be available to provide services for not less than the Base Period (as defined in Schedule 1) hereto per calendar quarter. The Company will have the option to request additional days, and Consultant will have the right to accept or decline such additional days in Consultant’s sole discretion.

 

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1.4    Consultant will provide the services in a timely and professional manner, in accordance with the performance level expected of a seasoned business professional, at times and locations reasonably agreed to by the Company and the Consultant. The Consultant shall cooperate with the Company’s personnel, shall not interfere with the conduct of the Company’s business, and shall observe all rules, regulations, and security requirements of the Company concerning the safety of persons and property. Consultant may be required to periodically travel in connection with performing the services hereunder, including, without limitation, to the Company’s headquarters or other locations maintained by the Company or its subsidiaries.

 

1.5    The Company shall provide such access to its information and property as may be reasonably required to permit the Consultant to perform the Consultant’s obligations under this Agreement.

 

2.    Compensation.

 

2.1    Consulting Fee. The Consultant shall be compensated in accordance with the compensation structure set forth on Schedule 1 attached hereto.

 

2.2    Reimbursement of Expenses. The Company shall reimburse the Consultant for all reasonable and customary expenses properly incurred or paid by the Consultant in connection with, or related to, the performance of services under this Agreement. However, the Consultant shall not incur expenses in excess of $5,000 during any calendar month without the written consent of David Parker. The Consultant shall submit to David Parker itemized statements on a monthly basis together with receipts if requested, in a form satisfactory to David Parker, of all such expenses incurred. Subject to the approval of David Parker, the Company shall pay such expenses directly or shall pay to the Consultant amounts shown on each such statement within thirty (30) days of receiving Consultant’s itemized statement.

 

2.3    Benefits. The Consultant shall not be entitled to any benefits, insurance coverage, or privileges, including, without limitation, social security, unemployment, medical, or pension payments, made available to employees of the Company, except only that during the consulting Term, the Company will provide Consultant with group health insurance benefits, access to the Company plane on existing terms and use of the “racing shop” on existing terms.

 

2.4    Taxes. No income tax or payroll tax of any kind shall be withheld or paid by the Company on behalf of the Consultant for any payment under this Agreement. The Consultant agrees to be responsible for all taxes and similar payments arising out of any of Consultant’s activities contemplated by this Agreement, including, without limitation, federal, state, and local income tax, social security tax (FICA), self-employment taxes, unemployment insurance taxes, and all other taxes, fees, and withholding. The Company shall not be obligated to pay to the Consultant any amounts hereunder until the Consultant shall provide to the Company the Consultant’s federal tax identification number and any other necessary information required by the Company to comply with applicable tax and other laws.

 

3.    Term and Termination.

 

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3.1    Term. Subject to Section 3.2 below, the term of this Agreement shall begin on the Effective Date and shall continue until December 31, 2022 (the “Term”).

 

3.2    Termination. The Company may, in its sole discretion, terminate this Agreement without liability (other than for amounts accrued for services through the effective date of termination and reimbursement of expenses) at any time upon 30 days’ written notice if Consultant: (i) engages in Subject Activities (as defined below) without the Company’s consent (or deemed consent as described below), (ii) violates any of the restrictive covenants set forth in Section 4 or 5 below in any material respect, (iii) fails to perform the services called for in this Agreement following written notice and an opportunity to cure, or (iv) engages in malfeasance toward the Company. In addition, the Agreement shall automatically terminate upon Consultant’s death or disability. For the avoidance of doubt, if the Consultant is terminated during a “Base Period” as defined by Schedule 1, the Consultant will only receive the full payment for that Base Period, but not any Base Periods thereafter.

 

Notwithstanding the foregoing, the parties expect the consulting Term to run through December 31, 2022, and Consultant shall plan his activities accordingly. In the event of early termination, Consultant will be entitled to receive only those payments hereunder that have accrued as of the date of termination.

 

4.    Restrictive Covenants. Consultant acknowledges and agrees the Company would not enter into this Agreement without the following restrictive covenants which are reasonable and necessary to protect the Company’s confidential information, business relationships and other legitimate business interests. Accordingly, Consultant hereby agrees to abide by, and cause all persons providing services hereunder to abide by, the following restrictive covenants:

 

(a)    Non-Solicitation. During the Term and for the period ending on the earlier of (a) June 30, 2023, or (b) one year following the termination of this Agreement (the “Restricted Period”), Consultant will not, directly or indirectly, without the prior written consent of the Company, which may be withheld in the Company’s sole and absolute discretion:

 

(i)    whether on Consultant’s own behalf or on behalf of another Person (defined below), solicit to provide any Competitive Services (defined below) to the following specific customers, shippers, carriers or clients, namely: Sonoco, Colgate, Eastman and BMW, but not further or otherwise; or

 

(ii)    whether on Consultant’s own behalf or on behalf of another Person, solicit to employ, as an employee, independent contractor, agent or otherwise, any of the following individuals, namely: Matt Anderson, Jim Massengill, Lynn Doster, Brande Tweed, Joey Ballard, Lyndal Harper, Paul Bunn, Sam Hough, George Yates, Steve Matthews, Matt Cashins, Jeff Collins, Jim Brower, Billy Cartwright, Rob Mullins, Don Burkhalter, Josh Garner, Eric Johnson, Chuck Wyse, D’Artis Jones, Bo Cordell, Nathan Cowart, Eddie Barnes, Will Acker, Mark Troxel, Matt Mullins, Louis Babbage, Heather Miranda, Dan Porterfield, Matt Duncan, Tripp Grant, Mike Chessor, Lisa Strader, Lathen Whited and/or Rob Coffman.

 

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“Competitive Business” means any business conducted by any subsidiary of the Company as of June 30, 2021 (including any business where strategic plans were in place as of such date to engage in such business).

 

“Competitive Services” means those services provided in the furtherance of a Competitive Business.

 

(b)    Notwithstanding the foregoing, the provisions of clause (a)(i) will not apply to any listed customer that ceases to be a customer of the Company or its subsidiaries, the provisions of clause (a)(ii) will not apply to any person whose employment has terminated at least six months prior to the solicitation, and the provisions of both clause (a)(i) and (a)(ii) will not apply after any “Change in Control” of the Company (as that phrase is defined in that certain First Amended and Restated Executive Severance Agreement between Landair Transport, Inc. and Consultant).

 

(c)    The parties agree as follows with respect to Subject Activities (defined below). For purposes of this Agreement, (i) “Subject Activities” shall mean and include making an Investment in, or providing Subject Services to, a Subject Company; (ii) “Investment” means any investment of money (whether in equity, debt, or otherwise) in a Subject Company, other than any passive investment of less than 5% of a publicly traded class of common equity; (iii) “Subject Services” means being employed by, or providing any services as an independent contractor, director, or similar service provider to, any Subject Company; and (iv) Subject Company means any business that derives at least 10% of its total revenue from dedicated contract carriage truckload, expedited team truckload, contract warehousing, TMS, or truckload freight brokerage services.

 

(d)    During the consulting Term, if Consultant desires to engage in any Subject Activities, Consultant will, at least 30 calendar days prior to engaging in any Subject Activities, (i) notify David Parker in writing of Consultant’s intention to engage in any such activity, and (ii) if Consultant has not already done so, inform the party with which Consultant intends to engage in Subject Activities of the Consultant’s non-solicitation covenants in favor of the Company.

 

(e)    Within 15 calendar days after receiving any such notice from Consultant, David Parker shall inform Consultant in writing whether (i) the Company consents to such activities, or (ii) engaging in the Subject Activities will cause the Company to terminate this Agreement.

 

(f)    If the Company consents to such activities or does not inform Consultant of its intention to terminate this Agreement within the 15-calendar day timeframe (which will be deemed to be consent to such activities), then this Agreement shall continue in full force and effect according to its terms and the Company may not terminate this Agreement due to the specific Subject Activity covered in the notice (but without impairing the rights and obligations of the parties as to any other or future Subject Activities).

 

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(g)    If the Company informs Consultant of its intent to terminate due to the proposed activities within the 15-calendar day timeframe, and Consultant informs the Company of Consultant’s decision not to engage in the proposed Subject Activities within 15 calendar days after receiving the Company’s notice, then this Agreement shall continue in full force and effect according to its terms so long as Consultant actually does not engage in the Subject Activities that were the subject of such notice.

 

(h)    If Consultant (i) engages in Subject Activities without providing the notice referred to above or without the Company’s consent (or deemed consent) after providing the notice referred to above, or (ii) fails to inform the Company of Consultant’s decision not to engage in the proposed Subject Activities within 15 calendar days after receiving the Company’s notice of intent to terminate, then the Company shall have the right (but not the obligation) to terminate this Agreement on 30 calendar days’ notice to Consultant. For clarity, even if the Company terminates this Agreement, Consultant’s restrictive covenants under this Section 4 will continue throughout the Restricted Period.

 

5.    Consultant Agreements.

 

5.1    For purposes of this Agreement, “Proprietary Information” means any and all information, data, and knowledge (whether in oral, written, graphic, electronic, machine-readable, or other form) of the Company or its subsidiaries that has been or is disclosed, provided, or made available to the Consultant that is not generally known by an individual, a corporation, an association, a partnership, group, an estate, a trust, or any other entity or organization, other than the Company (“Person(s)”) which if disclosed by the Company or its affiliates would assist in competition against the Company or its affiliates, including, but not limited to, information relating to (i) the development, research, testing, manufacturing, know how, marketing and financial activities of the Company, (ii) the products and services of the Company, (iii) the costs, sources of supply, financial performance, and strategic plans of the Company, (iv) the identity and needs of the customers of the Company, and (v) the other Persons with whom the Company has business relationships, including, but not limited to, employees and independent contractors of the Company, and the nature and substance of those relationships. Proprietary Information also includes any and all information belonging to customers or others that is received by the Company or its affiliates with any understanding, expressed or implied, that it would not be disclosed. Notwithstanding the foregoing, Proprietary Information shall not include any information which (w) is or becomes through no fault of the Consultant part of the public domain; (x) was already known to the Consultant at the time of disclosure; (y) is independently developed by the Consultant without reference to or use of any Proprietary Information received from the Company; or (z) was lawfully obtained by the Consultant from a third party not bound by a duty of confidentiality.

 

5.2    The Consultant agrees that the Consultant will not, during the Term or at any time thereafter, disclose to others, or use for the Consultant’s benefit or the benefit of others, any Proprietary Information. Consultant may become aware of material non-public information regarding the Company and its counterparties. Consultant will comply with applicable securities laws and the Company’s policies regarding trading in securities, and Consultant agrees to comply with trading windows established by the Company during the Term as if Consultant were an executive officer of the Company.

 

5

 

5.3    The Consultant’s obligations under this Section 5 shall not apply to any information that (i) is or becomes known to the general public under circumstances involving no breach by the Consultant of this Section 5, (ii) is disclosed to the Consultant by a third party unaffiliated with the Company who is not subject to an obligation of confidentiality to the Company, or (iii) is approved for release by written authorization of the Company specifically authorizing such release.

 

5.4    Nothing in this Section 5 prohibits Consultant from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the United States Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. Consultant does not need the prior authorization of the Company to make any such reports or disclosures and Consultant is not required to notify the Company that he has made such reports or disclosures.

 

5.5    Upon termination of this Agreement or at any other time upon request by the Company or David Parker, the Consultant shall promptly deliver to the Company all records, files, memoranda, notes, designs, data, reports, price lists, customer lists, drawings, plans, computer programs, software, software documentation, sketches, laboratory and research notebooks, and other documents (and all copies or reproductions of such materials) containing or based upon Proprietary Information.

 

6.    Independent Contractor Status.

 

Consultant and the Company understand and intend that the Consultant shall perform all services under this Agreement as an independent contractor and not as an employee or partner of the Company or its affiliates. The manner of and means by which the Consultant executes and performs the Consultant’s obligations hereunder are to be determined by the Consultant in the Consultant’s reasonable discretion. The Consultant will not have any personnel of the Company or its affiliates reporting to him and will not authorize decisions for the Company or its affiliates, sign documents on behalf of the Company or its affiliates, or bind the Company or its affiliates, except as specifically approved by David Parker in writing. For the avoidance of doubt and without limiting the generality of the foregoing, unless specifically authorized in writing by David Parker, (a) the Consultant will not have the authority to terminate the employment of any person or hire any person or change the compensation of any person; and (b) the Consultant will not have the authority to commit to capital expenditures.

 

7.    Counterparts.

 

This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument. Facsimile or electronic counterparts will be effective.

 

8.    Entire Agreement.

 

This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement, including, without limitation, any existing employment agreements or engagement agreements between the Company and the Consultant, each of which is terminated hereby.

 

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9.    Amendment.

 

This Agreement may be amended or modified only by a written instrument executed by both the Company and the Consultant.

 

10.    Assignment.

 

This Agreement is not assignable by any party without the consent of the other party, which consent shall not be unreasonably withheld, delayed, or conditioned.

 

11.    Waiver.

 

No delay or omission by the Company or its affiliates in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion.

 

12.    Severability.

 

In the event that any provision of this Agreement shall be invalid, illegal, or otherwise unenforceable, the validity, legality, and enforceability of the remaining provisions shall in no way be affected or impaired thereby.

 

13.    Other.

 

During the Term Consultant will continue to have use of the office he used as an employee of the Company. Consultant will also be permitted use of a Company administrative assistant for both services provided hereunder and services for Consultant’s own account, subject to Consultant’s obligation to reimburse the Company for the prorated portion of the administrative assistant expense on the same basis as currently in place. During the Term, Consultant or its designee will have continued use of the space referred to as the “racing shop” on existing terms.

 

 

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above set forth.

 

 

COMPANY:

 

CONSULTANT:

       

COVENANT LOGISTICS GROUP, INC.

 

TEAM JAT, LLC

         
         
         

By:

/s/ David Parker

 

By:

/s/ John Tweed

Name:

David Parker

 

Name:

John Tweed

       

Title:

Chief Executive Officer

 

Title:

[Manager]

 

In my capacity as the person carrying out services on behalf of the Consultant, I agree to be bound by Sections 1, 4, and 5 hereof as fully as though I were the Consultant hereunder, and the Company is entitled to rely on this statement.

 

/s/ John Tweed                           

John Tweed, individually

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Schedule 1

 

COMPENSATION

 

Consultant shall be compensated as follows:

 

 

1.

During the consulting Term, Consultant shall be paid the following as his sole compensation for services rendered:

 

 

a.

Fixed Consulting Fee. $128,000 per calendar quarter for up to twenty-five (25) full days (or equivalent taking into consideration partial days) of consulting work (the “Base Period”). During the first month of the Base Period Consultant shall submit to the company an invoice for the $128,000 payment due for that Base Period, plus any payments due for any half or full days worked in excess of 25 full days for that calendar quarter. Company shall pay all invoices in full within 15 days of receipt.

 

 

b.

Variable Consulting Fee. $5,000 per full day / $2,500 per half-day for days worked in excess of 25 full days per calendar quarter (including equivalent half-days) to the extent work was requested by the Company and mutually agreed by Consultant. Consultant shall submit to the Company a monthly report of excess days so devoted promptly following the last day of each month during the consulting Term. Consultant’s invoices shall be paid in accordance with the Company’s customary vendor practices.

9

Exhibit 31.1

 

I, David R. Parker, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Covenant Logistics Group, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: May 10, 2021

/s/ David R. Parker

 

David R. Parker

 

Principal Executive Officer

 

 

Exhibit 31.2

 

I, Joey B. Hogan, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Covenant Logistics Group, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: May 10, 2021

/s/ Joey B. Hogan

 

Joey B. Hogan

Principal Financial Officer

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

In connection with the Quarterly Report of Covenant Logistics Group, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David R. Parker, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: May 10, 2021

/s/ David R. Parker

 

David R. Parker

 

Chief Executive Officer

 

A signed original of this written statement required by Section 906 has been provided to Covenant Logistics Group, Inc. and will be retained by Covenant Logistics Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

 

In connection with the Quarterly Report of Covenant Logistics Group, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I,

Joey B. Hogan, President and Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:

 

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date:   May 10, 2021

/s/ Joey B. Hogan

  Joey B. Hogan
 

President and Principal Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to Covenant Logistics Group, Inc. and will be retained by Covenant Logistics Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.