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

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three and six months ended June 30,March 31, 2021 and 2020 and 2019

(In thousands, except per share data)

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

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

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)INCOME

FOR THE three and six months ended June 30,March 31, 2021 and 2020 and 2019

(InUnaudited and in thousands)

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

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE three and six months ended June 30,March 31, 2021 and 2020 and 2019

(Unaudited and in thousands)

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

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE sixthree months ended June 30,March 31, 2021 and 2020 and 2019

(InUnaudited and in thousands)

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

COVENANT LOGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

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.

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

Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 20192020, condensed consolidated balance sheet was derived from our audited balance sheet as of that date. Our operating results are subject to seasonal trends when measured on a quarterly basis; therefore, operating results for the sixthree months ended June 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 20202021. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 20192020. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year.

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. During the three and six months ended June 30, 2020, these changes in estimates resulted in an increase in depreciation and amortization expense of approximately $3.2 million, or a $2.2 million, or $0.13 per diluted share increase to net loss. 

Risks and Uncertainties

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and the President of the United States declared the COVID-19 a national emergency.  The rapid spread of the pandemic and the continuously evolving responses to combat it have had a continued negative impact on the global economy. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business. However, we are continuing to monitor the progression of the pandemic, further government response and development of treatments and vaccines and their potential effect on our 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 second quarter 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. 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), aggregate limits available in the coverage layer $9.0 million in excess of $1.0 million are estimated to be fully eroded based on current claims expense accruals. As a result, any increase increases to existing claims, and/or new claims filed prior to March 31, 2021, may require additional expense accruals.  Additionally, there is the possibility of mandatory reinstatement charges for the expired policy providing coverage in the $10.0 million in excess of $10.0 million layer, for accidents that occurred prior to expiration on March 31, 2020. Due to developments, we may experience additional expense accruals, increased insurance and claims expenses, which could have a material adverse effect on our business, financial condition, and results of operations. We maintain insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. In management's opinion, our potential exposure under pending legal proceedings is adequately provided for in the accompanying condensed consolidated financial statements. 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 closed on the dispositionsold a portfolio of substantially allaccounts 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 operationsCompany, to a subsidiary of Triumph Bancorp, Inc. ("Triumph") for approximately $122.3 million, consisting of $108.4 million in cash and assets$13.9 million in Triumph stock, plus an earn-out opportunity of TFS, which included substantially all ofup to $9.9 million. After 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.  Subsequent to the disposition,transaction closed, the Company and the purchaser of TFS’ assetsTriumph became involved in a dispute over the nature of approximately $66.0 million of the assets included in the Portfolio. The dispute was resolved on September 23, 2020 with an amendment of the purchase agreement and related funding arrangements that reduced the purchase price of the Portfolio to approximately $108.4 million, representing the cash amount received by us at closing. Additionally, the earnout opportunity was terminated and we are required to sell the Triumph stock we received at closing and will deliver the net proceeds to Triumph. In October 2020, we sold the Triumph stock acquired as part of the amended purchase agreement for $28.1 million and remitted the proceeds to Triumph upon settlement. The amended purchase agreement resulted in a gain on the sale of the Portfolio of $3.7 million, net of related expenses.

The amended purchase agreement specifically identified approximately $62.0 million accounts within the Portfolio, which related to advances on services that had not yet been performed, were placed in a loss sharing pool to be repaid with proceeds other than those generated from ordinary working capital factoring. To the extent losses on covered accounts are incurred, we will indemnify Triumph on a dollar for dollar basis for up to the first $30.0 million of losses, and on a 50% basis for up to the next $30.0 million of losses, for total indemnification exposure of up to $45.0 million (the “TFS Settlement”). During the fourth quarter of 2020, we recorded $44.2 million of contingent liabilities, reflected as other long-term liabilities from discontinued operations in our consolidated balance sheet, because as of December 31, 2020 it was probable and estimable that such amount would be due to Triumph under the TFS Settlement. During the first quarter of 2021, we received an indemnification call from Triumph of $35.6 million related to the dispositionTFS Settlement, all of which was reserved during the assetsfourth quarter of TFS. See Note 152020. for additional informationAdditionally, Triumph was able to collect some funds related to our fourth quarter 2020 accrual that allowed us the opportunity to reverse $3.4 million of our accrual. The payment of amounts with respect to the indemnification obligations could create volatility in our reported future financial results and could have an adverse effect on the risksour results of operations, cash flows, available liquidity, and uncertainties associated with this dispute. total indebtedness.

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, while depreciation for tax purposes is generally recorded using an accelerated method.assets. Depreciation of revenue equipment is our largest item of depreciation. We have historically depreciatedgenerally depreciate new tractors over five years to salvage values of approximately 15%that range from 10% to 35% of their cost.cost, depending on the operating segment profile of the equipment. We generally depreciate new trailers over seven years for refrigerated trailers and ten years for dry van trailers to salvage values of approximately 25%28% and 21% of their cost.cost, respectively. We annually review at least annually, 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. Gains and losses on the disposal of property and equipment are included in depreciation expense in the consolidated statements of operations.

Recent Accounting Pronouncements

Accounting Standards adopted

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

Accounting Standards not yet adopted

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

Basic income (loss) 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 (loss) 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 274,000 shares and 257,000132,000 shares issuable upon conversion of unvested restricted shares for the three and sixmonths ended June 30, 2020March 31, 2021, respectively.. Such shares were not included in the computation of the diluted loss(loss) income per share for the same periodsprior year period as the inclusion would have been anti-dilutive due to the net loss. There were no721,000 and 0 outstanding stock options at June 30,March 31, 2021 and March 31, 2020 or June 30, 2019., respectively. Income per share is the same for both Class A and Class B shares.

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

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

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

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

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

As of June 30, 2020, our former Factoring reportable segment was classified as discontinued operations as it: (i) iswas a component of the entity, (ii) meetsmet the criteria as held for sale, and (iii) hashad 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 Transport Financial Services (“TFS”), a division of Covenant Transport Solutions LLC, an indirect wholly owned subsidiary of the Company,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. 

Beginning with the period ended June 30, 2020, weWe have reflected the former Factoring reportable segment as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior periods have been adjusted to conform to the current presentation. The 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. 

The following table summarizes the results of our discontinued operations for the three months ended March 31, 2021 and six2020:

Operating income for the three months ended June 30, 2020 March 31, 2021and relates to the gain on the reversal of our contingent loss liability in the amount of $3.4 million. Reversal of contingent liability for the 2019three: months ended March 31, 2021 relates to the reduced exposure of future indemnification by the Company to Triumph, as a result of the collection of covered receivables identified in the amended purchase agreement, as described in Note 1.

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

The following table summarizes the major classes of assets and liabilities included as discontinued operations as of June 30, 2020 March 31, 2021and December 31, 2019:2020:

Net cash flows used by operating activities related to discontinued operations were $10.0 million and $20.0 million for the six months ended June 30, 2020 and 2019, respectively.  There were 0 investing or financingnet cash flows related to discontinued operations for either the sixthree months ended June 30,March 31, 2021. For the three months ended March 31, 2020, discontinued operations used $22.0 million of net cash flows from operating activities, and there were 0 related investing or 2019.financing cash flows.

The following unaudited summary information is presented on a consolidated pro forma basis as if the Factoring assets were sold as of January 1, 2019.2020.

The Company and the purchaser of TFS’ assets are involved in a dispute relatedRefer to the disposition. The purchaser asserts that, subsequent to the closing, it identified that approximately $66.0 millionNote 1, “Significant Accounting Policies” of the assets acquired  related to advances against future payments to be made pursuant to long-term contractual arrangements betweenaccompanying condensed consolidated financial statements for further information about the obligor on such contracts and TFS’ clients for services that had not yet been performed (as opposed to advances against future payments for services that had been performed), that this fact was not disclosed to the purchaser, and the purchase of such advances was not contemplated by theamended TFS purchase agreement. The Company is engaged in discussions to determine whether this dispute can be amicably resolved and is also evaluating other options should the discussions not produce an amicable resolution. It is too early to determine the likely outcome of this dispute, any liability or expenses the Company may incur, any cash the Company may need to pay or invest, any impact on the Company’s total leverage, or the gain or loss the Company ultimately may record on the transaction compared with the $26.5 million gain previously estimated. The facts are still being gathered, and a solution that is acceptable to both companies may or may not be found.

Until the second quarter of 2020, we had four reportable segments, Highway Services, Dedicated, Managed Freight, and Factoring.Factoring Services. As discussed in Note 3,above, our Factoring reportable segment was classified as discontinued operations as of June 30, 2020.As of September 30, 2020, the segment formerly known as Highway Services is now reflected as Expedited, given the change in business mix surrounding the exit of the majority of the solo-refrigerated business in the second quarter of 2020. In addition, given management changes and growth, we have reported Warehousing as a separate reportable segment from Managed Freight. We believe the updated reportable segments reflect our service offerings, strategic direction, and how management, including our chief operating decision maker, monitors our performance.

Our remainingfour reportable segments are as follows:include:

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in our 20192020 Form 10-K. Substantially all intersegment sales prices are market based. We evaluate performance based on operating income of the respective business units.

The following table summarizes our total revenue by our three4 reportable segments, disaggregated to the service offering level, as used by our chief operating decision makermakers in making decisions regarding allocation of resources etc., organized first by reportable segment and then by service offering for the three and sixmonths ended June 30, 2020March 31, 2021 and 20192020:

Income tax expense in both 20202021 and 20192020 varies from the amount computed by applying the federal corporate income tax rates of 21% to income before income taxes, primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Drivers who meet the requirements to receive per diem receive non-taxable per diem pay in lieu of a portion of their taxable wages. This per diem program increases our drivers' net pay per mile, after taxes, while decreasing gross pay, before taxes. As a result, salaries, wages, and related expenses are slightly lower and our effective income tax rate is higher than the statutory rate. Generally, as pre-tax income increases, the impact of the driver per diem program on our effective tax rate decreases, because aggregate per diem pay becomes smaller in relation to pre-tax income, while in periods where earnings are at or near breakeven the impact of the per diem program on our effective tax rate is significant. Due to the partially nondeductible effect of per diem pay, our tax rate will fluctuate in future periods based on fluctuations in earnings.

Our liability recorded for uncertain tax positions as of June 30, 2020March 31, 2021 has increaseddecreased by less than $0.1 million since December 31, 20192020.

The net deferred tax liability of $70.6$71.2 million primarily relates to differences in cumulative book versus tax depreciation of property and equipment, partially off-set by net operating loss carryovers and insurance claims that have been reserved but not paid. The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense. On a periodic basis, we assess the need for adjustment of the valuation allowance. Based on forecasted taxable income resulting from the reversal of deferred tax liabilities, primarily generated by accelerated depreciation for tax purposes in prior periods, and tax planning strategies available to us, a valuation allowance has been established at June 30, 2020March 31, 2021, for $0.4 million related to certain state net operating loss carryforwards. If these estimates and related assumptions change in the future, we may be required to modify our valuation allowance against the carrying value of the deferred tax assets.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”"CARES Act"). was signed into law. The CARES Act, among other things, includes provisions for refundable payroll tax credits, deferral offor employer-side social-security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. AlthoughThe Company considered the Company is still assessing the impactimpacts of the legislation we doin the not2020 expect therefinancial statements, noting that some items are continuing to be a materialassessed through preparation of the 2020 income tax impact to our consolidated financial statements at this time.

In the second quarter of 2020 we made significant changes to our operational business units, overhead structure and branding strategy 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 include (i) a reduction in our fleet of tractors and refrigerated trailers, which have historically produced unacceptable or unprofitable operating income, (ii) reallocation of our operating fleet toward our more profitable expedited, dedicated and irregular route operations, (iii) the sale of our Hutchins, Texas terminal and discontinued use of our Texarkana, Arkansas terminal, (iv) changes to key management and reductions to headcount, (v) the closure and early termination of our leased office space in Chattanooga, Tennessee that our brokerage group occupied, (vi) the installation of new operational processes allowing us to abandon or discontinue the use of a number of peripheral information technology infrastructure and applications and (vii) a change in our branding strategy to focus on one company name, phasing out the use of the Landair trade name.returns.

Although the significant majority of restructuring and cost savings initiatives were completed in the second quarter of 2020, we do anticipate additional costs in the third and fourth quarters of 2020, as we continue to optimize our fleet profile and management team.

We discontinued the use of a significant amount of property and equipment, including assets owned and held under operating leases. We have adjusted the carrying value of the owned property and equipment down to fair market value less estimated costs of disposal and classified them as available held for sale as of June 30, 2020. We expect to sell all the assets within the next twelve months. We terminated the lease agreement on a leased office facility in Chattanooga, TN during the second quarter of 2020 and recognized the related loss on the termination of the right of use asset and the abandonment of leasehold improvements within the impairment of property and equipment line item of the condensed consolidated statement of operations. The following table provides a summary of the asset groups impaired, amount of the impairment and a description of the valuation technique used to determine fair value. We believe that these impairment activities are substantially complete. Accordingly, we do not expect to incur additional charges in connection with this activity.

(in thousands)