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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

(Amendment No. 1)

(Mark One)

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

 

For the fiscal year ended December 31, 2020

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

a01.jpg

 

COVENANT LOGISTICS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

88-0320154

(State / other jurisdiction of incorporation or organization)

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

400 Birmingham Hwy.

 

Chattanooga, TN

37419

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code:

423 - 821-1212

 

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

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
$0.01 Par Value Class A common stockCVLGThe NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐ Yes   ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

☐ Yes   ☒ No

 

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

Yes   ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company, or 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 extending 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

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

Yes   ☒ No

 

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $137.0 million (based upon the $14.43 per share closing price on that date as reported by NASDAQ). In making this calculation the registrant has assumed, without admitting for any purpose, that all executive officers, directors, and affiliated holders of more than 10% of a class of outstanding common stock, and no other persons, are affiliates.

 

As of March 2, 2021, the registrant had 14,450,002 shares of Class A common stock and 2,350,000 shares of Class B common stock outstanding.

 

 

 

EXPLANATORY NOTE

 

Covenant Logistics Group, Inc. (the “Company”) files this Amendment No. 1 (“Amendment No. 1”) to its Annual Report on Form 10-K filed on March 5, 2021 for the fiscal year ended December 31, 2020 (the “Original 10-K”) to provide an amended report of KPMG LLP (KPMG), its previous independent registered public accounting firm, that includes a statement inadvertently omitted from the previously filed version that confirms KPMG did not audit the financial statements of Transport Enterprise Leasing, LLC (“TEL”) in 2019. In addition, this Amendment No. 1 includes as exhibits: (i) the TEL financial statements as of and for the years ended December 31, 2019 and 2018 and for the year ended December 31, 2017, (ii) consents of Coulter & Justus, P.C. related to the TEL financial statements, (iii) a new consent of KPMG, and (iv) in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications from the Company’s Principal Executive Officer and Principal Financial Officer dated as of the date of filing of this Amendment No. 1.

 

This Amendment No. 1 consists solely of the preceding cover page, this explanatory note, Part II., Item 8., “Financial Statements and Supplementary Data,” in its entirety, Part IV., Item 15., “Exhibits and Financial Statement Schedules,” in its entirety, and the signature page. The consolidated financial statements and notes to consolidated financial statements have remained the same as that previously filed in the Original 10-K.

 

This Amendment No. 1 speaks as of the date of the Original 10-K, does not reflect events that may have occurred after the date of the Original 10-K and does not modify or update in any way the disclosures made in the Original 10-K, except as described above. This Amendment No. 1 should be read in conjunction with the Original 10-K and with the Company’s subsequent filings with the SEC.

 

 
1

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The consolidated financial statements of Covenant Logistics Group, Inc. and subsidiaries, including the consolidated balance sheets as of December 31, 2020 and 2019, and the related statements of operations, statements of comprehensive income, statements of stockholders' equity, and statements of cash flows for each of the years in the three-year period ended December 31, 2020, together with the related notes, and the report of Grant Thornton LLP, our independent registered public accounting firm as of December 31, 2020, and for the year ended December 31, 2020, and the report of KPMG LLP, our independent registered public accounting firm as of December 31, 2019, and for each of the years in the two year period ended December 31, 2019, are set forth at pages 7 through 34 elsewhere in this report.

 

 

2

 

 

PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

 

 

 

(a)

1.

Financial Statements.

 

 

 

 

 

 

 

Our audited consolidated financial statements are set forth at the following pages of this report:

 

 

 

Report of Independent Registered Public Accounting Firm - Opinion on the Consolidated Financial Statements

7

    Report of Independent Registered Public Accounting Firm - Opinion on Internal Control Over Financial Reporting 8

 

 

Consolidated Balance Sheets

10

 

 

Consolidated Statements of Operations

11

 

 

Consolidated Statements of Comprehensive Income

12

 

 

Consolidated Statements of Stockholders' Equity

13

 

 

Consolidated Statements of Cash Flows

14

 

 

Notes to Consolidated Financial Statements

15

 

 

 

 

 

2.

Financial Statement Schedules.

 

 

 

 

 

 

 

Financial statement schedules are not required because all required information is included in the financial statements or is not applicable.

 

 

 

 

 

3.

Exhibits.

 

 

 

 

 

 

 

The exhibits required to be filed by Item 601 of Regulation S-K are listed under paragraph (b) below and on the Exhibit Index appearing at the end of this report. Management contracts and compensatory plans or arrangements are indicated by an asterisk.

 

 

 

 

(b)

 

Exhibits.

 

 

 

The following exhibits are filed with this Form 10-K or incorporated by reference to the document set forth next to the exhibit listed below.

 

Exhibit Number

Reference

Description

2.1   Accounts Receivable Purchase Agreement by and between Covenant Transport Solutions, LLC and Advance Business Capital LLC, dated as of July 8, 2020 (Incorporated by reference to Exhibit 2.1 to the Company's Form 10-Q, filed November 3, 2020)

3.1

 

Third Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K, filed July 2, 2020)

3.2

 

Fifth Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K, filed July 2, 2020)

4.1

 

Third Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K, filed July 2, 2020)

4.2

 

Fifth Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K, filed July 2, 2020)

4.3 # Description of the Registrant's Securities

10.1

*

Form of Indemnification Agreement between Covenant Transport, Inc. and each officer and director, effective May 1, 2004 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed August 5, 2004)

10.2

*

Form of Restricted Stock Award Notice under the 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Company's Form 10-Q, filed August 9, 2006)

10.3

*

Form of Restricted Stock Special Award Notice under the 2006 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.23 to the Company's Form 10-Q, filed August 9, 2006)

10.4

 

Third Amended and Restated Credit Agreement, dated September 23, 2008, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation (Incorporated by reference to Exhibit 10.14 to the Company's Form 10-K, filed March 30, 2010)

10.5

*

Covenant Transportation Group, Inc. Third Amended and Restated 2006 Omnibus Incentive Plan (Incorporated by reference to Appendix A to the Company's Schedule 14A, filed April 19, 2013)

10.6

 

Amendment No. 1 to Third Amended and Restated Credit Agreement, dated March 27, 2009, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed May 15, 2009)

10.7

 

Second Amendment to Third Amended and Restated Credit Agreement, dated February 25, 2010, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., JPMorgan Chase Bank, N.A., and Textron Financial Corporation (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed May 17, 2010)

10.8

 

Third Amendment to Third Amended and Restated Credit Agreement, dated July 30, 2010, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 9, 2010)

10.9

 

Fourth Amendment to Third Amended and Restated Credit Agreement, dated August 31, 2010, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed November 9, 2010)

10.10

 

Fifth Amendment to Third Amended and Restated Credit Agreement, dated September 1, 2011, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K, filed October 28, 2011)

 

3

 

 

10.11

 

Sixth Amendment to Third Amended and Restated Credit Agreement, dated effective as of October 24, 2011, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K, filed October 28, 2011)

10.12

 

Seventh Amendment to Third Amended and Restated Credit Agreement, dated effective as of March 29, 2012, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K, filed April 2, 2012)

10.13

 

Eighth Amendment to Third Amended and Restated Credit Agreement, dated effective as of December 31, 2012, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K, filed January 31, 2013)

10.14

 

Ninth Amendment to Third Amended and Restated Credit Agreement and Related Security Documents, dated effective as of August 6, 2014, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 13, 2014)

10.15

 

Tenth Amendment to Third Amended and Restated Credit Agreement and Related Security Documents, dated effective as of September 8, 2014, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, Inc., Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed November 13, 2014)

10.16

 

Joinder, Supplement and Eleventh Amendment to Third Amended and Restated Credit Agreement, dated effective as of August 6, 2015, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Driven Analytic Solutions, LLC, Covenant Properties, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 9, 2015)

10.17

 

Twelfth Amendment to Third Amended and Restated Credit Agreement, dated effective as of February 25, 2016, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Driven Analytic Solutions, LLC, Covenant Properties, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed May 10, 2016)

10.18

 

Thirteenth Amendment to Third Amended and Restated Credit Agreement, dated effective as of December 16, 2016, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Driven Analytic Solutions, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.26 to the Company's Form 10-K, filed March 14, 2017)

10.19

 

Fourteenth Amendment to Third Amended and Restated Credit Agreement, dated effective as of November 28, 2017, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, Inc., Star Transportation, Inc., Driven Analytic Solutions, LLC, Transport Management Services, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.27 to the Company's Form 10-K, filed February 28, 2018)

10.20

 

Fifteenth Amendment to Third Amended and Restated Credit Agreement, dated effective as of June 19, 2018, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, LLC, Star Transportation, Inc., Covenant Logistics, Inc., Driven Analytic Solutions, LLC, Transport Management Services, LLC, Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed August 8, 2018)

10.21

 

Sixteenth Amendment to Third Amended and Restated Credit Agreement, dated effective as of July 3, 2018, among Covenant Transportation Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, LLC, Star Transportation, Inc., Covenant Logistics, Inc., Driven Analytic Solutions, LLC, Transport Management Services, LLC, Landair Holdings, Inc., Landair Transport, Inc., Landair Logistics, Inc., Landair Leasing, Inc., Bank of America, N.A., and JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 9, 2018)

10.22   Seventeenth Amendment to Third Amended and Restated Credit Agreement, dated as of September 23, 2020, among Covenant Logistics Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, LLC, Star Transportation, Inc., Covenant Logistics, Inc., Transport Management Services, LLC, Landair Holdings, Inc., Landair Transport, Inc., Landair Logistics, Inc., Landair Leasing, Inc., and Bank of America, N.A. (Incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q, filed November 3, 2020)
10.23 # Eighteenth Amendment to Third Amended and Restated Credit Agreement, dated as of October 23, 2020, among Covenant Logistics Group, Inc., Covenant Transport, Inc., CTG Leasing Company, Covenant Asset Management, LLC, Southern Refrigerated Transport, Inc., Covenant Transport Solutions, LLC, Star Transportation, Inc., Covenant Logistics, Inc., Transport Management Services, LLC, Landair Holdings, Inc., Landair Transport, Inc., Landair Logistics, Inc., Landair Leasing, Inc., and Bank of America, N.A.
10.24 * First Amendment to the Covenant Transportation Group, Inc. Third Amended and Restated 2006 Omnibus Incentive Plan (Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed with the SEC on April 8, 2019 in connection with the 2019 Annual Meeting of Stockholders)

10.25

* Second Amendment to the Company’s Third Amended and Restated 2006 Omnibus Incentive Plan (Incorporated by reference to Appendix A to the Company's Schedule 14A, filed June 8, 2020)

 

4

 

 

10.26 * Form of Restricted Stock Award Notice under the Third Amended and Restated 2006 Omnibus Incentive Plan, as amended (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed August 9, 2019)
10.27 * Form of Restricted Stock Award Notice under the Third Amended and Restated 2006 Omnibus Incentive Plan, as amended (Double Trigger Change in Control) (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed August 10, 2020)
10.28 #* Form of Option Award Notice under the Third Amended and Restated 2006 Omnibus Incentive Plan, as amended
10.29 * Form of Executive Severance Agreement (Incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q, filed November 3, 2020)
10.30 * Separation Agreement between Richard Cribbs and Transport Management Services, LLC (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q, filed November 3, 2020)
10.31   Account Management Agreement, Amendment to Purchase Agreement and Mutual Release, by and among Covenant Transport Solutions, LLC, Covenant Logistics Group, Inc., Triumph Bancorp, Inc., and Advance Business Capital LLC, dated as of September 23, 2020 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q, filed November 3, 2020)
10.32   Draw Note in the face amount of $45.0 million by Covenant Logistics Group, Inc. and Covenant Transport Solutions, LLC with TBK Bank, SSB as Lender and Agent, dated as of September 23, 2020 (Incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q, filed November 3, 2020)

21

#

List of Subsidiaries

23.1

#

Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP

23.2 ## Consent of Independent Registered Public Accounting Firm - KPMG LLP
23.3 ## Consent of Independent Registered Public Accounting Firm – Coulter & Justus, P.C.
23.4 ## Consent of Independent Auditor – Coulter & Justus, P.C.

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 M. Paul Bunn, 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 M. Paul Bunn, the Company's Chief Financial Officer

99   Financial Statements of Transport Enterprise Leasing, LLC. (Incorporated by reference to Exhibit 99 to the Company's Form 10-K, filed March 9, 2020)

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 (formatted as Inline XBRL and contained in Exhibit 101)

 

References:

#

Filed as an exhibit to the Original 10-K.

## Filed herewith.
### Furnished herewith.

*

Management contract or compensatory plan or arrangement.

 

5

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

COVENANT Logistics GROUP, INC.

 

 

 

 

 

 

 

Date: April 6, 2021

By:

/s/ M. Paul Bunn

 

 

 

M. Paul Bunn

 

 

 

Executive Vice President, Chief Financial Officer, and Secretary in his capacity as such and as duly authorized on behalf of the issuer.

 

 

 

6

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Covenant Logistics Group, Inc.

 

Opinion on the financial statements

 

We have audited the accompanying consolidated balance sheet of Covenant Logistics Group, Inc. (a Nevada holding company) (and subsidiaries) (the “Company”) as of December 31, 2020, the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for the year ended  December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 5, 2021 expressed an unqualified opinion.

 

 

Basis for opinion

 

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

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

Critical audit matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a  separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Auto Liability Self-Insurance Reserves

As described further in Note 1 to the consolidated financial statements, the Company has significant self-insured amounts related to its auto liability and has exposure to fluctuations in the number and severity of claims and to variations between estimated and actual ultimate payouts. The Company records a liability for the uninsured portion of pending claims and claims related expenses, including legal and other direct costs associated with the claim, based on estimates made by management. Estimates require judgment concerning the nature and severity of the claim, historical trends, and other relevant information based on specific facts and circumstances for individual claims.  We identified the estimation of the Company’s auto liability accrual subject to self-insured insurance retention amounts as a critical audit matter. Incurred auto claim liabilities are determined by projecting the estimated ultimate loss related to a claim, less actual costs paid to date, based on the assumption that historical claim patterns are an accurate representation of future claim development.

 

The principal considerations for assessing auto liability claims as a critical audit matter are the high level of estimation uncertainty related to determining the severity of these types of claims, as well as the inherent subjectivity in management’s judgment in estimating the total costs to settle or dispose of these claims.

 

Our audit procedures related to this critical audit matter included the following, among others:

 

 

We tested the design and operating effectiveness of key controls over the accrued auto liability, including, but not limited to, controls to validate that claims were reported and recorded accurately and controls related to the review and approval of initial claim reserves, subsequent changes to claim reserves, and projected claim liabilities.

 

We tested a sample of underlying claims through analysis of accident reports and insurance and legal records to validate information utilized by management in determining the accrual was complete and accurate.

 

We reconciled claims data to the actuarial software used to determine loss development factors and tested management’s estimation methodology.

 

We utilized a specialist in evaluating management’s calculated loss development factors to test that the factors provide a reasonable basis for determining estimated loss reserves.

 

We performed a retrospective review of prior year and current year reserves to validate that changes in estimated losses were appropriate and supported by current year claim development.

 

/s/ Grant Thornton LLP

We have served as the Company's auditor since 2020.

 

Atlanta, Georgia

March 5, 2021

 

7

 

Report of Independent Registered Public Accounting Firm

 

 

Board of Directors and Shareholders

Covenant Logistics Group, Inc.

 

Opinion on internal control over financial reporting

 

We have audited the internal control over financial reporting of Covenant Logistics Group, Inc. (a Nevada holding company) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal ControlIntegrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated March 5, 2021 expressed an unqualified opinion on those financial statements.

 

Basis for opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and limitations of internal control over financial reporting

 

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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.

 

/s/ Grant Thornton LLP

 

Atlanta, Georgia
March 5, 2021

 

8

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors
Covenant Logistics Group, Inc.:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheet of Covenant Logistics Group, Inc. (and subsidiaries) (the Company) as of December 31, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

 

We did not audit the financial statement of Transport Enterprise Leasing, LLC (a 49% percent owned investee company). The Company's investment in Transport Enterprise Leasing, LLC was $31.9 million as of December 31, 2019, and its equity in earnings of Transport Enterprise Leasing, LLC was $7.0 million for the year ended December 31, 2019. The financial statement of Transport Enterprise Leasing, LLC were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Transport Enterprise Leasing, LLC, is based solely on the report of the other auditors.

 

Adoption of ASU 2016-02

 

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of ASU 2016-02 Leases, and subsequently issued additional ASU's amending this ASU (collectively ASC 842, Leases).

 

Basis for Opinion

 

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

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit and the report of the other auditors provides a reasonable basis for our opinion.

 

/s/ KPMG LLP

 

We served as the Company’s auditor from 2001 to 2020.

 

Nashville, Tennessee

March 9, 2020 except for Notes 1 (Segment Realignment), 2, and 15, as to which the date is March 5, 2021

 

9

 

 

COVENANT Logistics GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2020 and 2019

(In thousands, except share data)

 

  

2020

  

2019

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $8,407  $43,591 

Accounts receivable, net of allowance of $2,992 in 2020 and $1,440 in 2019

  91,295   81,207 

Drivers' advances and other receivables, net of allowance of $764 in 2020 and $692 in 2019

  13,624   8,507 

Inventory and supplies

  3,119   4,210 

Prepaid expenses

  11,924   11,705 

Assets held for sale

  15,007   12,010 

Income taxes receivable

  4,155   5,403 

Other short-term assets

  265   1,132 

Current assets from discontinued operations

  -   86,620 

Total current assets

  147,796   254,385 
         

Property and equipment, at cost

  541,276   725,383 

Less: accumulated depreciation and amortization

  (149,824)  (208,180)

Net property and equipment

  391,452   517,203 
         

Goodwill

  42,518   42,518 

Other intangibles, net

  24,518   29,615 

Other assets

  60,897   37,919 
Noncurrent assets from discontinued operations  9,535   - 
         

Total assets

 $676,716  $881,640 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Checks outstanding in excess of bank balances

 $1,215  $592 

Accounts payable

  31,695   19,500 

Accrued expenses

  38,538   31,840 

Current maturities of long-term debt

  7,577   54,377 

Current portion of finance lease obligations

  5,687   7,258 
Current portion of operating lease obligations  16,989   19,460 

Current portion of insurance and claims accrual

  30,221   21,800 

Other short-term liabilities

  643   185 

Current liabilities of discontinued operations, net

  816   6,245 

Total current liabilities

  133,381   161,257 
         

Long-term debt

  47,888   200,177 

Long-term portion of finance lease obligations

  10,756   26,010 
Long-term portion of operating lease obligations  21,474   40,882 

Insurance and claims accrual

  44,077   20,295 

Deferred income taxes

  74,553   80,330 

Other long-term liabilities

  9,794   2,578 

Other long-term liabilities of discontinued operations

  44,151   - 

Total liabilities

  386,074   531,529 
Commitments and contingencies  -   - 

Stockholders' equity:

        

Class A common stock, $.01 par value; 40,000,000 shares authorized; 16,183,139 shares issued and 14,784,214 outstanding as of December 31, 2020; and 40,000,000 authorized; 16,165,145 shares issued and outstanding as of December 31, 2019

  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

  143,438   141,885 

Treasury stock at cost; 1,398,925 and no shares as of December 31, 2020 and 2019, respectively

  (17,067)  - 

Accumulated other comprehensive loss

  (2,251)  (1,014)
Retained earnings  166,325   209,043 
Total stockholders' equity  290,642   350,111 
Total liabilities and stockholders' equity $676,716  $881,640 

 

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

 

 

10

 

 

COVENANT Logistics GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2020, 2019, and 2018

(In thousands, except per share data)

 

  

2020

  

2019

  

2018

 

Revenues

            

Freight revenue

 $776,218  $791,260  $774,691 

Fuel surcharge revenue

  62,343   94,127   105,726 

Total revenue

 $838,561  $885,387  $880,417 
             

Operating expenses:

            

Salaries, wages, and related expenses

  315,023   320,498   303,441 

Fuel expense

  77,443   115,307   121,264 

Operations and maintenance

  48,368   59,506   55,505 

Revenue equipment rentals and purchased transportation

  222,705   204,655   183,645 

Operating taxes and licenses

  11,621   13,024   11,831 

Insurance and claims

  53,052   47,719   43,328 

Communications and utilities

  5,898   6,968   7,059 

General supplies and expenses

  34,143   30,089   22,787 
Depreciation and amortization  65,472   80,502   75,843 

(Gain) loss on disposition of property and equipment, net

  (7,706)  (1,650)  298 
Impairment of long lived property, equipment, and right-of-use assets  26,569   -   - 

Total operating expenses

  852,588   876,618   825,001 

Operating (loss) income

  (14,027)  8,769   55,416 

Interest expense, net

  6,841   8,218   7,344 

Income from equity method investment

  (3,944)  (7,017)  (7,732)
(Loss) income from continuing operations  (16,924)  7,568   55,804 

Income tax (benefit) expense

  (2,804)  2,349   14,944 
(Loss) income from continuing operations  (14,120)  5,219   40,860 
(Loss) income from discontinued operations, net of tax  (28,598)  3,258   1,643 

Net (loss) income

 $(42,718) $8,477  $42,503 
             

Basic (loss) income per share:

            
(Loss) income from continuing operations $(0.81) $0.28  $2.23 

(Loss) income from discontinued operations

 $(1.65) $0.18  $0.09 

Net (loss) income

 $(2.46) $0.46  $2.32 
Diluted (loss) income per share:            
(Loss) income from continuing operations $(0.81) $0.28  $2.21 

(Loss) income from discontinued operations

 $(1.65) $0.17  $0.09 
Net (loss) income $(2.46) $0.45  $2.30 

Basic weighted average shares outstanding

  17,358   18,435   18,340 

Diluted weighted average shares outstanding

  17,358   18,635   18,469 

 

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

 

11

 

 

COVENANT Logistics GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, and 2018

(In thousands)

 

  

2020

  

2019

  

2018

 
             

Net (loss) income

 $(42,718) $8,477  $42,503 
             

Other comprehensive (loss):

            
             

Unrealized (loss) gain on effective portion of cash flow hedges, net of tax of $548, $437, and $377 in 2020, 2019 and 2018, respectively

  (1,898)  (1,278)  993 
             

Reclassification of cash flow hedge losses (gains) into statement of operations, net of tax of ($189), ($5), and $408 in 2020, 2019 and 2018, respectively

  655   15   (1,076)
             

Unrealized holding loss on investments classified as available-for-sale

  6   45   (6)

Total other comprehensive (loss)

  (1,237)  (1,218)  (89)
             

Comprehensive (loss) income

 $(43,955) $7,259  $42,414 

 

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

 

12

 

 

COVENANT Logistics GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, and 2018

(In thousands)

 

                  

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, 2017

 $171  $24  $137,242  $-  $293  $157,471  $295,201 

Net income

  -   -   -   -   -   42,503   42,503 

Effect of adoption of ASU 2014-09

  -   -   -   -   -   592   592 

Other comprehensive loss

  -   -   -   -   (89)  -   (89)

Stock-based employee compensation expense

  -   -   4,802   -   -   -   4,802 

Issuance of restricted shares, net

  -   -   133   -   -   -   133 

Balances at December 31, 2018

 $171  $24  $142,177  $-  $204  $200,566  $343,142 

Net income

  -   -   -   -   -   8,477   8,477 

Other comprehensive loss

  -   -   -   -   (1,218)  -   (1,218)

Stock-based employee compensation expense

  -   -   819   -   -   -   819 

Issuance of restricted shares, net

  2   -   (1,111)  -   -   -   (1,109)

Balances at December 31, 2019

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

Net loss

  -   -   -   -   -   (42,718)  (42,718)
Share repurchase  -   -   -   (17,486)  -   -   (17,486)

Other comprehensive loss

  -   -   -   -   (1,237)  -   (1,237)

Stock-based employee compensation expense

  -   -   2,270   419   -   -   2,689 

Issuance of restricted shares, net

  -   -   (717)  -   -   -   (717)

Balances at December 31, 2020

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

 

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

 

13

 

 

COVENANT Logistics GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, and 2018

(In thousands)

 

  

2020

  

2019

  

2018

 

Cash flows from operating activities:

            

Net (loss) income

 $(42,718) $8,477  $42,503 

Adjustments to reconcile net income to net cash provided by operating activities:

            

Provision for losses on accounts receivable

  3,134   255   507 

Deferral (reversal) of gain on sales to equity method investee, net

  14   (7)  (189)

Depreciation and amortization

  65,480   80,529   75,859 
Impairment of property and equipment  26,569   -   - 

Amortization of deferred financing fees

  154   147   148 

Deferred income tax (benefit) expense

  (15,092)  3,454   13,840 

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

  167   (105)  (44)

Stock-based compensation expense

  2,270   819   5,177 

Equity in income of affiliate

  (3,944)  (7,017)  (7,732)

Return on investment in affiliated company

  1,470   1,225   1,960 

(Gain) loss on disposition of property and equipment

  (7,677)  (2,829)  298 
Loss on disposition of reportable segment  40,431   -   - 

Return on investment in available-for-sale securities

  (25)  13   (13)

Changes in operating assets and liabilities:

            

Receivables and advances

  (60,849)  (6,706)  (27,199)

Prepaid expenses and other assets

  531   487   (2,127)

Inventory and supplies

  1,091   (143)  168 

Insurance and claims accrual

  32,203   945   2,412 

Accounts payable and accrued expenses

  19,831   (15,513)  19,232 

Net cash flows provided by operating activities

  63,040   64,031   124,800 
             

Cash flows from investing activities:

            

Acquisition of Landair Holdings, Inc., net of cash acquired

  -   -   (105,946)

Redemption (purchase) of available-for-sale securities

  1,442   (1,365)  (1,496)

Acquisition of property and equipment

  (94,049)  (138,273)  (75,142)

Proceeds from disposition of reportable segment

  108,375   -   - 

Proceeds from disposition of property and equipment

  122,278   46,609   61,687 

Net cash flows provided (used in) investing activities

  138,046   (93,029)  (120,897)
             

Cash flows from financing activities:

            

Change in checks outstanding in excess of bank balances

  839   (1,265)  1,857 

Proceeds from issuance of notes payable

  75,591   107,251   100,811 

Repayments of notes payable

  (289,834)  (44,278)  (89,569)

Repayments of capital lease obligations

  (20,083)  (7,225)  (3,883)

Proceeds under revolving credit facility

  1,341,678   1,734,338   1,598,213 

Repayments under revolving credit facility

  (1,326,678)  (1,738,249)  (1,603,309)

Payment of minimum tax withholdings on stock compensation

  (297)  (1,110)  (242)

Debt refinancing costs

  -   -   (10)

Common stock repurchased

  (17,486)  -   - 

Net cash flows (used in) provided by financing activities

  (236,270)  49,462   3,868 
             

Net change in cash and cash equivalents

  (35,184)  20,464   7,771 
             

Cash and cash equivalents at beginning of year

  43,591   23,127   15,356 

Cash and cash equivalents at end of year

 $8,407  $43,591  $23,127 
             

Supplemental disclosure of cash flow information:

            
Cash paid (received) during the year for:            
Interest, net of capitalized interest $7,365  $11,026  $8,568 
Income taxes $870  $752  $(5,388)
Non-cash transactions during the year for:            
Equipment purchased under finance leases $3,258  $-  $19,638 
Contingent liabilities $44,151  $-  $- 

 

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

 

14

 

COVENANT Logistics GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019, and 2018

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

On July 1, 2020, the stockholders of Covenant Transportation Group, Inc. approved the amendment to the organization’s Articles of Incorporation to change the Company’s name to Covenant Logistics Group, Inc. All references herein reflect the change of name to Covenant Logistics Group, Inc.

 

Covenant Logistics Group, Inc., a Nevada holding company, together with its wholly owned subsidiaries offers transportation and logistics services to customers throughout the continental United States. 

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Covenant Logistics Group, Inc., a holding company incorporated in the state of Nevada in 1994, and its wholly owned subsidiaries: Covenant Transport, Inc., a Tennessee corporation; Star Transportation, LLC, a Tennessee limited liability company, each d/b/a Covenant Transport Services and Covenant Logistics; Southern Refrigerated Transport, LLC, an Arkansas limited liability company; Covenant Transport Solutions, LLC, a Nevada limited liability company; Covenant Logistics, Inc., a Nevada corporation; Covenant Asset Management, LLC, a Nevada limited liability company; CTG Leasing Company, a Nevada corporation; IQS Insurance Risk Retention Group, Inc., a Vermont corporation; Heritage Insurance, Inc., a Tennessee corporation; Landair Holdings, Inc., a Tennessee corporation; Landair Transport, Inc., a Tennessee corporation; Landair Logistics, Inc., a Tennessee corporation; Landair Leasing, Inc., a Tennessee corporation; and Transport Management Services, LLC, a Tennessee limited liability company.

 

References in this report to "it," "we," "us," "our," the "Company," and similar expressions refer to Covenant Logistics Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Segment Realignment

 

In 2020, we made a number of changes to our organizational structure in an effort to streamline our business in a manner that we believe will allow us to significantly lower our fixed costs, pay down debt and produce consistent acceptable margins. These changes impacted the Company’s reportable operating segments but did not impact the Company’s Consolidated Financial Statements. We have recast prior year information to conform to the realignment. Under this revised reporting structure, we have four reportable operating segments, which include:

 

Non-dedicated truckload services ("Expedited"), which services customers with high service freight and delivery standards, such as 1,000 miles in 22 hours, or 15-minute delivery windows. 

Dedicated contract truckload services (“Dedicated”), which consists of our truckload business that involves longer-term contracts that allocate a specified number of tractors and trailers to a specific customer, with fixed and variable compensation. 

Managed Freight services, which consists of our brokerage and transportation management services ("TMS") and provides logistics capacity by outsourcing the carriage of customers' freight to third parties, as well as, comprehensive logistics services on a contractual basis to customers who prefer to outsource their logistics needs.

Warehousing services (“Warehousing”), provides day-to-day warehouse management services to customers who have chosen to outsource this function.

 

The following table summarizes our revenue by our four reportable operating segment, at the service offering level, as used by our chief operating decision maker in making decisions regarding allocation of resources, etc., for the years ended December 31, 2020, 2019, and 2018:

 

  

Year ended December 31,

 

(in thousands)

 

2020

  

2019

  

2018

 

Revenues:

            

Expedited

 $320,202  $356,521  $469,308 

Dedicated

  288,652   342,473   257,739 

Managed Freight

  177,579   138,616   129,790 

Warehousing

  52,128   47,777   23,580 

Total revenues

 $838,561  $885,387  $880,417 

 

Investment in Transport Enterprise Leasing, LLC

 

Transport Enterprise Leasing, LLC ("TEL") is a tractor and trailer equipment leasing company and used equipment reseller. We evaluated our investment in TEL to determine whether it should be recorded on a consolidated basis. Our percentage of ownership interest (49%), an evaluation of control, and whether a variable interest entity ("VIE") existed were all considered in our consolidation assessment. Based on the analysis, the Company is not the primary beneficiary of TEL and TEL should not be consolidated. We have accounted for our investment in TEL using the equity method of accounting given our 49% ownership interest and ability to exercise significant influence over operating and financial policies. Under the equity method, the cost of our investment is adjusted for our share of equity in the earnings of TEL and reduced by distributions received and our proportionate share of TEL's net income is included in our earnings.

 

15

 
 

On a periodic basis, we assess whether there are any indicators that the fair value of our investment in TEL may be impaired. The investment is impaired only if the estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss would be measured as the excess of the carrying amount of the investment over the fair value of the investment. As a result of TEL's earnings, no impairment indicators were noted that would provide for impairment of our investment during the years ended December 31, 2020 and 2019.

 

Risks and Uncertainties

 

We are continuing to monitor the progression of the COVID-19 pandemic, further government response, and development of treatments and vaccines and their potential effect on our short-term and long-term financial position, results of operations, cash flows and liquidity. These events could have an impact in future periods on certain estimates used in the preparation of our 2020 financial results, including, but not limited to impairment of goodwill, other intangible assets and other long-lived assets, income tax provision and recoverability of certain receivables. Local, state and national governments continue to emphasize the importance of transportation and have designated it as an essential service. The health and safety of our team members and the community is our first priority, as such, we've put certain measures into place, including remote work arrangements, enforced social distancing and increased sanitation protocols, among others. Should the pandemic continue for an extended period of time, the impact on our operations could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity.

 

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. Effective April 1, 2020, consistent with an extremely difficult insurance market for the industry, our insurance renewal terms include a higher fixed premium expense of approximately $0.5 million per quarter, greater self-insured retention, and lower aggregate limits than prior coverage. 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.

 

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 were required to sell, and subsequently sold, the Triumph stock we received at closing for $28.1 million and remitted the proceeds to Triumph upon settlement.

 

The amended purchase agreement specifically identified approximately $62.0 million of accounts within the Portfolio, which related to advances on services that had not yet been performed, that 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 amended purchase agreement resulted in a gain on the sale of the Portfolio of $3.7 million, net of related expenses. During the fourth quarter of 2020, the Company 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 amended purchase agreement.

 

To date no indemnification obligations have been required to be funded and the Company and Triumph are cooperating to manage the covered accounts and assist the clients with, among other things, operational improvements in an attempt to minimize losses on the covered accounts.

 

Revenue Recognition

 

Revenue, drivers' wages, and other direct operating expenses generated by our Expedited and Dedicated reportable segments are recognized proportionally as the transportation service is performed based on the percentage of miles completed as of the period end. Revenue is recognized on a gross basis at amounts charged to our customers because we control and are primarily responsible for the fulfillment of the promised service. Revenue includes transportation revenue, fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services.

 

Revenue generated by our Managed Freight reportable segment is recognized upon completion of the services provided. Revenue is recorded on a gross basis, without deducting third party purchased transportation costs, as we act as a principal with substantial risks as primary obligor. Revenue for the Warehousing reportable segment is generally recognized as the service is performed, based upon a weekly rate.

 

 

There are no assets or liabilities recorded in conjunction with revenue recognized, other than accounts receivable and allowance for doubtful accounts. We recognized in-process revenue of $1.2 million, $0.8 million, and $1.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. We had accounts receivable, net of allowance for doubtful accounts, of $91.3 million, $81.2 million, and $97.5 million at December 31, 2020, 2019, and 2018, respectively.

 

Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

 

 

16

 

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with a maturity of three months or less at acquisition to be cash equivalents. Additionally, we are also subject to concentrations of credit risk related to deposits in banks in excess of the Federal Deposit Insurance Corporation limits.

 

Accounts Receivable and Concentration of Credit Risk

 

We extend credit to our customers in the normal course of business, which are generally due within 30-45 days of the services performed. We perform ongoing credit evaluations and generally do not require collateral. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts outstanding longer than contractual payment terms are considered past due and are reviewed individually for collectability. We maintain reserves for potential credit losses based upon loss history and specific receivables aging analysis. Receivable balances are written off when collection is deemed unlikely.

 

Accounts receivable are comprised of a diversified customer base that mitigates the level of concentration of credit risk. During 2020, 2019, and 2018, our top ten customers generated 48%, 45%, and 49% of total revenue, respectively. In 20202019, and 2018 one customer accounted for more than 10% of our consolidated revenue in each year. The carrying amount reported in the consolidated balance sheet for accounts receivable approximates fair value based on the fact that the receivables collection averaged approximately 38 days and 33 days in 2020 and 2019, respectively.

 

The following table provides a summary (in thousands) of the activity in the allowance for doubtful accounts for 2020, 2019, and 2018

 

Years ended December 31:

 Beginning balance January 1,  Additional provisions to allowance  Write-offs and other adjustments  Ending balance December 31, 
                 

2020

 $1,440  $3,011  $(1,459) $2,992 
                 

2019

 $1,577  $141  $(278) $1,440 
                 

2018

 $1,258  $182  $137  $1,577 

 

Inventories and Supplies

 

Inventories and supplies consist of parts, tires, fuel, and supplies. Tires on new revenue equipment are capitalized as a component of the related equipment cost when the tractor or trailer is placed in service and recovered through depreciation over the life of the vehicle. Replacement tires and parts on hand at year end are recorded at the lower of cost or net realizable value with cost determined using the first-in, first-out (FIFO) method. Replacement tires are expensed when placed in service.

 

Assets Held for Sale

 

Assets held for sale include property and revenue equipment no longer utilized in continuing operations which are available and held for sale. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of depreciated book value or fair market value less selling costs. We periodically review the carrying value of these assets for possible impairment. We expect to sell these assets within twelve months.

 

Change in Estimates

 

The Company reviews the estimated useful lives and salvage values of its assets on an ongoing basis, based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. During the second quarter of 2020, the Company adjusted the useful lives of certain intangible finite-lived assets, including the Landair trade name and non-compete agreement, and certain revenue equipment held under operating leases as the result of management changes, a change in the branding of the organization, and the forward looking use of these assets. These changes are being treated as a change in accounting estimate, which during the twelve months ended December 31, 2020, resulted in an increase in depreciation and amortization expense of approximately $3.2 million, or a $2.5 million, or $0.14, per diluted share decrease to net income. 

 

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. 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. 

 

We lease certain revenue equipment under finance and operating leases with terms of approximately 48 to 84 months. Amortization of assets under finance and operating leases are included in depreciation and amortization expense and revenue and equipment rentals and purchased transportation, respectively.

 

Pursuant to applicable accounting standards, revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised value of the assets, as appropriate. We recognized an impairment of $26.6 million during the twelve months ended December 31, 2020. See Note 3, "Cost Savings and Restructuring" for additional discussion around the impairment.

 

17

 
 

A portion of our tractors are protected by non-binding indicative trade-in values or binding trade-back agreements with the manufacturers. The remainder of our tractors and substantially all of our owned trailers are subject to fluctuations in market prices for used revenue equipment. Moreover, our trade-back agreements are contingent upon reaching acceptable terms for the purchase of new equipment. Declines in the price of used revenue equipment or failure to reach agreement for the purchase of new tractors with the manufacturers issuing trade-back agreements could result in impairment of, or losses on the sale of, revenue equipment.

 

Goodwill and Other Intangible Assets

 

We classify intangible assets into two categories: (i) intangible assets with finite lives subject to amortization and (ii) goodwill. We test goodwill for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. We test intangible assets with finite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. We record an impairment charge when the carrying value of the finite lived intangible asset is not recoverable by the cash flows generated from the use of the asset.

 

We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement, the history of the asset, our long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have finite lives are amortized, generally on a straight-line basis, over their remaining useful lives, ranging from 3 to 15 years.

 

Impairment of Long-Lived Assets

 

Pursuant to applicable accounting standards, revenue equipment and other long-lived assets are tested for impairment whenever an event occurs that indicates an impairment may exist. Expected future cash flows are used to analyze whether an impairment has occurred. If the sum of expected undiscounted cash flows is less than the carrying value of the long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of the asset less its disposal cost to its carrying value. Fair value is determined based on a discounted cash flow analysis or the appraised value of the assets, as appropriate.

 

Insurance and Other Claims

 

The primary claims arising against us consist of auto liability (personal injury and property damage), workers' compensation, cargo, commercial liability, and employee medical expenses. At  December 31, 2020, our insurance program involves self-insurance with the following risk retention levels (before giving effect to any commutation of an auto liability policy):

 

 

auto liability - 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 at December 31, 2020 and we replaced such layer with a new $7.0 million in excess of $3.0 million policy that runs from January 28, 2021 to April 1, 2024

 

workers' compensation - $1.3 million

 

cargo - $0.3 million

 

employee medical - $0.4 million

 

physical damage - 100%

 

Due to our significant self-insured retention amounts, we have exposure to fluctuations in the number and severity of claims and to variations between our estimated and actual ultimate payouts. We record a liability for the estimated cost of the uninsured portion of pending claims and the estimated allocated loss adjustment expenses including legal and other direct costs associated with a claim. Estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the size of any potential damage award based on factors such as the specific facts of individual cases, the jurisdictions involved, the prospect of punitive damages, future medical costs, and inflation estimates of future claims development, and the legal and other costs to settle or defend the claims. We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance coverage, our profitability could be adversely affected.

 

In addition to estimates within our self-insured retention layers, we also must make judgments concerning claims where we have third party insurance and for claims outside our coverage limits. Upon settling claims and expenses associated with claims where we have third party coverage, we are generally required to initially fund payment to the claimant and seek reimbursement from the insurer. Receivables from insurers for claims and expenses we have paid on behalf of insurers were $0.0 and $0.3 million at December 31, 2020 and 2019, respectively, and are included in drivers' advances and other receivables on our consolidated balance sheet. Additionally, we accrue claims above our self-insured retention and record a corresponding receivable for amounts we expect to collect from insurers upon settlement of such claims. We have $7.4 million and $0.0 million as other short-term assets and a corresponding accrual in the short-term portion of insurance and claims accruals and $24.4 million and $2.1 million as other long-term assets and as a corresponding accrual in the long-term portion of insurance and claims accruals on our consolidated balance sheet for claims above our self-insured retention for which we believe it is reasonably assured that the insurers will provide their portion of such claims at December 31, 2020 and 2019, respectively. We evaluate collectability of the receivables based on the credit worthiness and surplus of the insurers, along with our prior experience and contractual terms with each. If any claim occurrence were to exceed our aggregate coverage limits, we would have to accrue for the excess amount. Our critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much.

 

We also make judgments regarding the ultimate benefit versus risk of commuting certain periods within our auto liability policy. If we commute a policy, we assume 100% risk for covered claims in exchange for a policy refund.

 

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 included 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 could be made before April 1, 2021. Additionally, our prior auto liability policy that ran from October 1, 2014 through March 31, 2018, was commuted, resulting in a premium release of $7.3 million. 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 December 31, 2020. We carry excess policy layers above the primary auto liability policy described above.

 

18

 
 

Interest

 

We capitalize interest on major projects during construction. Interest is capitalized based on the average interest rate on related debt. Capitalized interest was less than $0.1 million in 2020 and 2018 and approximately $0.1 million in 2019, respectively.

 

Fair Value of Financial Instruments

 

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, available-for-sale securities, accounts payable, debt, and interest rate swaps. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and current debt approximates their fair value because of the short-term maturity of these instruments. The carrying value of the factored receivables approximates the fair value, as the receivables are generally repaid directly to us by the client's customer within 30–40 days due to the combination of the short-term nature of the financing transaction and the underlying quality of the receivables. 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 at December 31, 2020, as the weighted average interest rate on these notes approximates the market rate for similar debt. Borrowings under our revolving Credit Facility approximate fair value due to the variable interest rate on the facility. Additionally, certain investments intended to serve the purposes of capital preservation and to fund insurance losses are designated as available-for-sale and are valued based on quoted prices in active markets. 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 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.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We have reflected the net liability after offsetting our deferred tax assets and liabilities in the deferred income taxes line in the accompanying consolidated balance sheets. We believe the future tax deductions will be realized principally through future reversals of existing taxable temporary differences and future taxable income, except for when a valuation allowance has been provided as discussed in Note 10.

 

In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.

 

Our policy is to recognize income tax benefit arising from the exercise of stock options and restricted share vesting based on the ordering provisions of the tax law as prescribed by the Internal Revenue Code, including indirect tax effects, if any.

 

Lease Accounting

 

At the commencement date of a new lease agreement with contractual terms longer than twelve months, we recognize an asset and a lease liability on the balance sheet and categorize the lease as either finance or operating. Certain lease agreements have lease and non-lease components, and we have elected to account for these components separately.

 

Right-of-use assets and lease liabilities are initially recorded based on the present value of lease payments over the term of the lease. When the rate implicit in the lease is readily determinable, this rate is used for calculating the present value of remaining lease payments; otherwise, our incremental borrowing rate is used. The incremental borrowing rate represents an estimate of the interest rate we would incur at the lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. Right-of-use assets also include prepaid lease expenses and initial direct costs of executing the leases, which are reduced by landlord incentives. Options to extend or terminate a lease agreement are included in or excluded from the lease term, respectively, when those options are reasonably certain to be exercised. Right-of-use assets are tested for impairment in the same manner as long-lived assets.

 

Finance lease obligations are utilized to finance a portion of our revenue equipment and are entered into with certain finance companies who are not parties to our Credit Facility and may contain guarantees of the residual value of the related equipment by us. As such, the residual guarantees are included in the related debt balance as a balloon payment at the end of the related term as well as included in the future minimum finance lease payments. These lease agreements require us to pay personal property taxes, maintenance, and operating expenses. Our operating lease obligations do not typically include residual value guarantees or material restrictive covenants.

 

19

 
 

Right-of-use assets are included in net property and equipment. For finance leases, right-of-use assets are amortized on a straight-line basis over the shorter of the expected useful life or the lease term, and the carrying amount of the lease liability is adjusted to reflect interest expense, which is recorded in interest expense, net. Operating lease right-of-use assets are amortized over the lease term on a straight-line basis, and the lease liability is measured at the present value of the remaining lease payments. Variable lease payments not included in the lease liability for mileage charges on leased revenue equipment are expensed as incurred. Operating lease costs are recognized on a straight-line basis over the term of the lease within operating expenses.

 

Capital Structure

 

The shares of Class A and B common stock are substantially identical except that the Class B shares are entitled to two votes per share and immediately convert to Class A shares if beneficially owned by anyone other than our Chief Executive Officer or certain members of his immediate family, while Class A shares are entitled to one vote per share. The terms of any future issuances of preferred shares will be set by our Board of Directors.

 

Income Per Share

 

Basic income 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 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 195,000; 200,000; and 129,000 shares issuable upon conversion of unvested restricted shares for the years ended  December 31, 2020, 2019, and 2018, respectively. Of such shares, 195,000 unvested shares have been excluded from the calculation of diluted earnings per share since the effect of any assumed exercise of the related awards would be anti-dilutive for the year ended December 31, 2020. There were approximately 70,000; 0; and 0 shares issuable upon conversion of unvested employee stock options for the years ended  December 31, 2020, 2019, and 2018, respectively. Of such options, 70,000 unvested options have been excluded from the calculation of diluted earnings per share since the effect of any assumed exercise of the related options would be anti-dilutive for the year ended December 31, 2020. Income per share is the same for both Class A and Class B shares.

 

The following table sets forth the calculation of net income per share included in the consolidated statements of operations for each of the three years ended December 31:

 

(in thousands except per share data)

            
  

2020

  

2019

  

2018

 

Numerators:

            
(Loss) income from continuing operations $(14,120) $5,219  $40,860 
(Loss) income from discontinued operations  (28,598)  3,258   1,643 

Net (loss) income

 $(42,718) $8,477  $42,503 

Denominator:

            
             

Denominator for basic income per share – weighted-average shares

  17,358   18,435   18,340 

Effect of dilutive securities:

            

Equivalent shares issuable upon conversion of unvested restricted shares

  -   200   129 
Equivalent shares issuable upon conversion of unvested employee stock options  -   -   - 

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

  17,358   18,635   18,469 
             

Basic (loss) income per share:

            
Income (loss) from continuing operations $(0.81) $0.28  $2.23 
(Loss) income from discontinued operations $(1.65) $0.18  $0.09 

Net (loss) income per basic share

 $(2.46) $0.46  $2.32 
Diluted (loss) income per share:            
Income (loss) from continuing operations $(0.81) $0.28  $2.21 
(Loss) income from discontinued operations $(1.65) $0.17  $0.09 

Diluted income per share

 $(2.46) $0.45  $2.30 

 

Stock-Based Employee Compensation

 

We issue several types of stock-based compensation, including awards that vest based on service, market, and performance conditions or a combination of the conditions. Performance-based and market-based awards vest contingent upon meeting certain performance or market criteria, respectively, established by the Compensation Committee of the Board of Directors. All awards require future service. For performance-based awards, determining the appropriate amount to expense in each period is based on likelihood and timing of achieving the stated targets for performance-based awards and requires judgment, including forecasting future financial results. The estimates are revised periodically based on the probability and timing of achieving the required performance and adjustments are made as appropriate. Awards that are only subject to time vesting provisions are amortized using the straight-line method.

 

Recent Accounting Pronouncements

 

20

 
 

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 us 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.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, the requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, the evaluation of step up in the tax basis goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The Company adopted these provisions in the first quarter of 2021 and the adoption did not have a material impact on its consolidated financial statements.

 

There are no other new accounting pronouncements that are expected to have a significant impact on our consolidated financial statements.

 

 

2.

DISCONTINUED OPERATIONS

 

As of June 30, 2020, our previously identified 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 consolidated statements of operations for all periods presented. Prior periods have been adjusted to confirm to the current presentation.

 

The following table summarizes the results of our discontinued operations for the twelve months ended December 31, 2020, 2019, and 2018:

 

(in thousands)

 

Twelve months ended December 31,

 
  

2020

  

2019

  

2018

 

Total revenue

 $5,397  $9,140  $5,038 

Operating expenses

  1,149   1,876   1,467 
Gain on disposal  (3,720)  -   - 
Loss contingency  44,151   -   - 

Operating (loss) income

  (36,183)  7,264   3,571 

Interest expense

  1,950   2,892   1,363 

(Loss) income before income taxes

  (38,133)  4,372   2,208 

Income tax (benefit) expense

  (9,535)  1,114   565 

Net (loss) income from discontinued operations, net of tax

 $(28,598) $3,258  $1,643 

 

As of December 31, 2020, we had a contingent liability due to Triumph recorded in other long-term liabilities from discontinued operations on our consolidated balance sheet of $44.2 million. Based on the terms of the amended purchase agreement, as described in Note 1, we estimate our possible indemnification exposure to be from $44.2 million to $45.0 million.

 

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 December 31, 2020 and 2019:

 

(in thousands)

 

December 31, 2020

  

December 31, 2019

 

Current assets:

        

Accounts receivable, net of allowance of $0 in 2020 and $408 in 2019

 $-  $86,620 

Current assets of discontinued operations

  -   86,620 
Noncurrent deferred tax asset  9,535   - 
Noncurrent assets from discontinued operations  9,535   - 
Total assets from discontinued operations $9,535  $86,620 
         

Current liabilities: