See notes to condensed consolidated financial statements.

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(in thousands)

See notes to Condensed Consolidated Financial Statements.

P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

SeptemberJune 30, 20, 202017

NOTE A:   BASIS OF PRESENTATION

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q10-Q to “P.A.M.,” the “Company,” “we,” “our,” or “us” mean P.A.M. Transportation Services, Inc. and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q10-Q and Article 10 of Regulation S-X.S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’smanagement’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2016 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the nine-monththree and six-month period ended SeptemberJune 30, 2017 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 2020. For further information, refer to the consolidated financial statements and the footnotes thereto included in the Company’s annual report on Form 10-K10-K for the year ended December 31, 2016.2019.

NOTE B:B:   RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, March 2020, the Financial Accounting Standards Board, (“FASB”),FASB issued Accounting Standards Update (“ASU”) No. 2014-09,2020-04, (“ASU 2014-09”2020-04”), Revenue from Contracts with Customers. The objectiveReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2014-09 and subsequent amendments is2020-04 was issued to establishprovide optional guidance for a single comprehensive model for entitieslimited period of time to useease the potential burden in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle ofreference rate reform on financial reporting. ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification, (“ASC”). The new guidance, as amended,2020-04 is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is not permitted prior to annual periods beginning after as of March 12, 2020 through December 31, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09.

2022. The Company has performed an analysisevaluated the provisions of this standard and determined that it is applicable to our line of credit and investment margin account. The London Interbank Offered Rate “LIBOR” is the effectsbasis for interest charges on outstanding borrowings for both our line of adopting this guidance.credit and investment margin account. The analysis included the following items:

●     identifying what constitutes a contract within the Company’s business practices,

●     identifying performance obligations within our contracts,

●     determining transaction prices,

●     allocating the transaction pricescheduled discontinuation of LIBOR is not expected to performance obligations,

●     determinationmaterially alter any provisions of when performance obligations are satisfied and revenue is earned,

●     disaggregation of revenue by source within segments, and

●     principal versus agent considerations.

Based upon our evaluation, the adoption of ASU No. 2014-09 and subsequent amendments will result in additional note disclosures regarding the nature of the Company’s contracts with customers and the Company’s significant judgments regarding the applicationeither of these standards. However, the adoption of this guidance is not expected to have a significant impact on the Company’s financial condition, results of operations, or cash flows.

In January 2016, the FASB issued ASU 2016-01, (“ASU 2016-01”), Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financialdebt instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017. With certain exceptions, early adoption is not permitted.

The Company has performed a preliminary analysis of the effects of adopting this guidance. This analysis consisted of the following items:

Based upon this evaluation, the adoption of this guidance is not expected to have a significant impact on the Company’s financial condition or cash flows, but it is expected to have a significant impact on the Company’s results of operations through the recognition of changes in market value each reporting period rather than recognizing them through comprehensive income.

In February 2016, the FASB issued ASU No. 2016-02, (“ASU 2016-02”), Leases (Topic 842). This update seeks to increase the transparency and comparability among entities by requiring public entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. To satisfy the standard’s objective, a lessee will recognize a right-of-use asset representing its right to use the underlying assetexcept for the lease term andidentification of a lease liability for the obligation to make lease payments. Both the right-of-use asset and lease liability will initially be measured at the present value of the lease payments, with subsequent measurement dependent on the classification of the lease as either a finance or an operating lease. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Accounting by lessors will remain mostly unchanged from current U.S. GAAP.

In transition, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized in accordance with the business combinations guidance for leases. The new standard is effective for public companies for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted.replacement reference rate. The Company has evaluated the new guidance and does not expect it to have a material impact on its financial condition, results of operations, or cash flows since the Company’s current leases will expire prior to the effective date of this guidance.flows.

In MarchJune 2016, the FASB issued ASU No. 2016-09,2016-13, (“ASU 2016-09”2016-13”), Compensation – Stock Compensation (Topic 718). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance on January 1, 2017, did not have a significant impact on the Company’s financial condition, results of operations, or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, (“ASU 2016-13”), Accounting for Credit Losses (Topic 326)326). ASU 2016-132016-13 requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to the amortized cost of the securities. For smaller reporting companies, ASU 2016-132016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, 2022, with early adoption permitted. The Company is evaluating the newadoption of this guidance but does on January 1, 2020 did not expect it to have a material impact on itsthe Company’s financial condition, results of operations, or cash flows.

In August 2016, the FASB issued ASU No. 2016-15, (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 amends the guidance in ASC 230, Statement of Cash Flows, and clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. NOTE C:   REVENUE RECOGNITION

The Company has evaluateda single performance obligation, to transport our customer’s freight from a specified origin to a specified destination. The Company has the effectsdiscretion to choose to self-transport or to arrange for alternate transportation to fulfill the performance obligation. Where the Company decides to self-transport the freight, the Company classifies the service as truckload services, and where the Company arranges for alternate transportation of adopting ASU 2016-15the freight, the Company classifies the service as brokerage and does not expect itlogistics services. In either case, the Company is paid a rate to havetransport freight from its origin location to a material impact onspecified destination. Because the primary factors influencing revenue recognition, including performance obligation, customer base, and timing of revenue recognition, are the same for both of its financial condition, results of operations, or cash flows.service categories, the Company utilizes the same revenue recognition method throughout its operations.

Company revenue is generated from freight transportation services performed utilizing heavy truck trailer combinations. While various ownership arrangements may exist for the equipment utilized to perform these services, including Company owned or leased, owner-operator owned, and third-party carriers, revenue is generated from the same base of customers. Contracts with these customers establish rates for services performed, which are predominantly rates that will be paid to pick up, transport and drop off freight at various locations. In addition to transportation, revenue is also awarded for various accessorial services performed in conjunction with the base transportation service. The Company also has other revenue categories that are not discussed in this note or broken out in our Condensed Consolidated Statements of Operations due to their immaterial amounts.

In November 2016,fulfilling the FASB issued ASU No. 2016-18, (“ASU 2016-18”), StatementCompany’s obligation to transport freight from a specified origin to a specified destination, control of Cash Flows (Topic 230). ASU 2016-18 requiresfreight is transferred to us at the point it has been loaded into the driver’s trailer, the doors are sealed and the driver has signed a bill of lading, which is the basic transportation agreement that establishes the nature, quantity and condition of the freight loaded, the responsibility for invoice payment and the pickup and delivery locations. Our revenue is generated, and our customer receives benefit, as the freight progresses towards delivery locations. In the event our customer cancels the shipment at some point prior to the final delivery location and re-consigns the shipment to an alternate delivery location, we are entitled to receive payment for services performed for the partial shipment. Shipments are generally conducted over a statementrelatively short time span, generally one to three days; however, freight is sometimes stored temporarily in our trailer at one of cash flows explainour drop yard locations or at a location designated by a customer. Our revenue is categorized as either Freight Revenue or Fuel Surcharge Revenue, and both are earned by performing the changesame freight transportation services, as discussed further below.

Freight Revenue – revenue generated by the performance of the freight transportation service, including any accessorial service, provided to customers.

Fuel Surcharge Revenue – revenue designed to adjust freight revenue rates to an agreed upon base cost for diesel fuel. Diesel fuel prices can fluctuate widely during the period interm of a contract with a customer. At the total of cash, cash equivalents, and amounts generally describedpoint that freight revenue rates are negotiated with customers, a sliding scale is agreed upon that approximately adjusts diesel fuel costs to an agreed-upon base amount. In general, as restricted cash or restricted cash equivalents. This standardfuel prices increase, revenue from fuel surcharge increases, so that diesel fuel cost is intendedadjusted to reduce diversity in practice in how restricted cash or restricted cash equivalents are presented and classified in the statement of cash flows. ASU No. 2016-18 is effective for fiscal years and interim periods, beginning after December 15, 2017, with early adoption permitted. The standard requires application using a retrospective transition method. The adoption of ASU No. 2016-18 will change the presentation and classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows but is not expected to have a material impact on our financial condition, results of operations, or cash flows.approximate base amount agreed upon.

In May 2017,Revenue is recognized over time as the FASB issued ASU No. 2017-09, ("ASU 2017-09"), Compensation – Stock Compensation (Topic 718) which provides guidance about which changesfreight progresses towards its destination and the transportation service obligation is fulfilled. For loads picked up during the reporting period, but delivered in a subsequent reporting period, revenue is allocated to each period based on the termstransit time in each period as a percentage of total transit time. There are no assets or conditions of a share-based payment award require an entity to apply modification accountingliabilities recorded in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017conjunction with revenue recognized, other than Accounts Receivable and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. The Company has evaluated the effects of adopting ASU 2017-09 and does not expect it to have a material impact on its financial condition, results of operations, or cash flows.Estimated Credit Losses.

With the exception of the new standards discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2017, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, that are of significance or potential significance to the Company.

NOTE C:D:   MARKETABLE EQUITY SECURITIES

The Company accounts for its marketable securities in accordance with ASC Topic 320, (“ASC Topic 320”), Investments-Debt and Equity Securities. ASC Topic 320 requires companies to classify their investments as trading, available-for-sale, or held-to-maturity. The Company’s investments in marketable securities are classified as available-for-sale and consist of equity securities. Management determines the appropriate classification of these securities at the time of purchase and re-evaluates such designation as of each balance sheet date. There were no reclassifications of marketable securities between trading and available-for-sale categories during the first nine months of 2017 or 2016.with readily determinable fair values. The cost of securities sold is based on the specific identification method, and interest and dividends on securities are included in non-operating income (expense).income.

Marketable equity securities are carried at fair value, with the unrealized gains and losses net of tax, included as a component of accumulated other comprehensive income in shareholders’ equity. Realized gains and losses and declines infair market value judged to be other-than-temporary on available-for-sale securities, if any, are included in the determination of net income. A quarterly evaluationThe fair value of marketable equity securities is performeddetermined based on quoted market prices in order to judge whether declinesactive markets, as described in value below cost should be considered temporary and when losses are deemed to be other-than-temporary. Several factors are considered in this evaluation process including the severity and duration of the decline in value, the financial condition and near-term outlook for the specific issuer and the Company’s ability to hold the securities.

For the quarter ended September 30, 2017, the evaluation resulted in an impairment charge of approximately $15,000 in the Company’s non-operating income (expense) in its statement of operations. For the quarter ended September 30, 2016, the evaluation resulted in an impairment charge of approximately $176,000 in the Company’s non-operating income (expense) in its statement of operations.

For the nine-month period ended September 30, 2017, the evaluation resulted in an impairment charge of approximately $42,000 in the Company’s non-operating income (expense) in its statement of operations. For the nine-month period ended September 30, 2016, the evaluation resulted in an impairment charge of approximately $709,000 in the Company’s non-operating income (expense) in its statement of operations.

Note J.

The following table sets forth market value, cost, and unrealized gains on equity securities as of SeptemberJune 30, 2017 2020 and December 31, 2016.2019.

The following table sets forth the gross unrealized gains and losses on the Company’sCompany’s marketable securities as of SeptemberJune 30, 2017 2020 and December 31, 2016.2019.

As

The following table shows the Company’sCompany’s net realized gains during the first ninethree and six months ending on June 30 of 20172020 and 20162019, respectively, on certain marketable equity securities.

For the quarter ended SeptemberJune 30, 2017, 2020, the Company recognized dividends received of approximately $225,000$326,000 in non-operating income in its consolidated statements of operations. For the quarter ended SeptemberJune 30, 2016, 2019, the Company recognized dividends received of approximately $279,000$307,000 in non-operating income in its consolidated statements of operations.

For the ninesix months ended SeptemberJune 30, 2017, 2020, the Company recognized dividends received of approximately $718,000$631,000 in non-operating income in its consolidated statements of operations. For the ninesix months ended SeptemberJune 30, 2016, 2019, the Company recognized dividends received of approximately $781,000$586,000 in non-operating income in its consolidated statements of operations.

The market value of the Company’sCompany’s equity securities are periodically used as collateral against any outstanding margin account borrowings. As of SeptemberJune 30, 2017 2020, and December 31, 2016, 2019, the Company had outstanding borrowings of approximately $5,707,000$9,986,000 and $10,358,000,$7,474,000, respectively, under its margin account. Margin account borrowings are used for the purchase of marketable equity securities and as a source of short-term liquidity and are included in Accrued expenses and other liabilities on our balance sheets.

Our marketable equity securities portfolio had a net unrealized pre-tax gain in market value of approximately $2,482,000 during the second quarter of 2020, and a net unrealized pre-tax loss in market value of approximately $589,000 during the second quarter of 2019, which were reported as non-operating income for the respective periods.

NOTE DE:   STOCK-BASED COMPENSATION

The Company maintains a stock incentive plan (the “Plan”) under which incentive and nonqualified stock options and other stock awards may be granted. On March 2, 2006, the Company’s Board of Directors (the “Board”) adopted, and shareholders later approved, the 2006 Stock Option Plan (the “2006 Plan”). Under the 2006 Plan, 750,000 shares were reserved for the issuance of stock options to directors, officers, key employees, and others. The option exercise price under the 2006 Plan is the fair market value of the stock on the date the option is granted. The fair market value is determined by the average of the highest and lowest sales prices for a share of the Company’s common stock, on its primary exchange, on the same date that the option is granted. On March 13, 2014, the Board adopted, and on May 29, 2014 our shareholders approved, the 2014 Amended and Restated Stock Option and Incentive Plan (the “2014 Plan”) which replaced the 2006 Plan. The shares which remained reserved under the 2006 Plan were carried over to the 2014 Plan and are reserved for the issuance of stock awards to directors, officers, key employees, and others. The stock option exercise price and the restricted stock purchase pricevalue under the 2014 Plan shall not be less than 85% of the fair market value of the Company’s common stock on the date the award is granted. The fair market value is determined by the closing price of the Company’s common stock, on its primary exchange, on the same date that the option or award is granted.

Outstanding nonqualified stock options at September 30, 2017, must be exercised within either five or ten years from the date of grant. Outstanding nonqualified stock options granted to members of the Board vested immediately while outstanding nonqualified stock options issued to employees vest in increments of 20% to 33% each year.

During In January 2020, the first nine months of 2017, 4,298Company granted 7,000 shares of common stock were granted to non-employee directors under the 2014 Plan and 100,000 shares of commoncertain key employees. These stock were granted to the Company’s Chief Executive Officer. The stock awarded to non-employee directors hadawards have a grant date fair value of $16.29$56.45 per share, based on the closing price of the Company’s stock on the date of grant, and vest on the fourth anniversary date in January 2024.

In March 2020, the Company granted 2,608 shares of common stock to non-employee directors. These stock awards have a grant date fair value of $30.75 per share, based on the closing price of the Company’s stock on the date of grant, and vested immediately. The

In April 2020, the Company granted 242 shares of common stock awardedto a new non-employee director upon his election to the Chief Executive Officer hadboard of directors. This stock award has a grant date fair value of $16.38$41.40 per share, based on the closing price of the Company’s stock on the date of grant, with 33% of the award vesting on each anniversary of the date of grant for the next three years.and vested immediately.

The total grant date fair value of stock and stock options vested during the firstninesix months of 20172020 was approximately $186,000.$636,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the first ninesix months of 20172020, was approximately $446,000$326,000 and includes approximately $70,000$90,000 recognized as a result of the grant of 614 shares to each non-employee director during the first quarter of 2017.director. The recognition of stock-based compensation expense decreased both diluted and basic earnings per common share by approximately $0.02$0.04 during the third quarterfirstsix months of 2017. The recognition of stock-based compensation expense decreased both diluted and basic earnings per common share by approximately $0.05 during the nine months ended September 30, 2017.2020. As of SeptemberJune 30, 2017, 2020, the Company had stock-based compensation plans with total unvested stock-based compensation expense of approximately $1,501,000$603,000, which is being amortized on a straight-line basis over the remaining vesting period. As a result, the Company expects to recognize approximately $168,000$109,000 in additional compensation expense related to unvested option awards during the remainder of 20172020 and to recognize approximately $644,000, $552,000,$215,000, $215,000, $59,000 and $137,000$5,000 in additional compensation expense related to unvested option awards during the years 2018, 2019,2021,2022,2023 and 2020,2024, respectively.

The total grant date fair value of stock and stock options vested during the firstninesix months of 20162019 was approximately $202,000.$685,000. Total pre-tax stock-based compensation expense recognized in Salaries, wages and benefits during the third quarterfirstsix months of 20162019 was approximately $56,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits during the first nine months of 2016 was approximately $251,000$526,000 and includes approximately $70,000$100,000 recognized as a result of the grant of 325 shares to each non-employee director during the first quartersix months of 2016.2019. The recognition of stock-based compensation expense decreased basic earnings per common share by approximately $0.01 during the third quarter ended September 30, 2016. The recognition of stock-based compensation expense decreasedboth diluted and basic earnings per common share by approximately $0.02 and $0.03, respectively,$0.07 during the ninefirstsix months ended September 30, 2016.of 2019. As of SeptemberJune 30, 2016, 2019, the Company had stock-based compensation plans with total unvested stock-based compensation expense of approximately $290,000$1,438,000, which is being amortized on a straight-line basis over the remaining vesting period.

Information related to stock option activity for the nine months ended September 30, 2017 is as follows:

* The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The per share market value of our common stock, as determined by the closing price on September 29, 2017, was $23.93.

A summary of the status of the Company’sCompany’s non-vested options and restricted stock as of SeptemberJune 30, 2017 2020 and changes during the ninesix months ended SeptemberJune 30, 2017, 2020, is as follows: