ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The unaudited condensed consolidated financial statements include the accounts of U.S. Xpress Enterprises, Inc., a Nevada corporation, and its consolidated subsidiaries. References in this report to “we,” “us,” “our,” the “Company,” and similar expressions refer to U.S. Xpress Enterprises, Inc. and its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
This report contains certain statements that may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues or other financial items; any statement of plans, strategies, outlook, growth prospects or objectives of management for future operations; our operational and financial targets; general economic trends, performance or conditions and trends in the industry and markets; the competitive environment in which we operate; any statements concerning proposed new services, technologies or developments; and any statement of belief and any statements of assumptions underlying any of the foregoing. In this Form 10-Q, statements relating to the impact of new accounting standards, future tax rates, expenses, and deductions, expected freight demand, capacity, and volumes, potential results of a default under our Credit Facility or other debt agreements, expected sources of working capital and liquidity (including our mix of debt, finance leases, and operating leases as means of financing revenue equipment), expected capital expenditures, expected fleet age and mix of owned versus leased equipment, expected impact of technology, including the impact of event recorders and our strategic initiatives, future customer relationships, future growth of dedicated contract services, future growth in independent contractors and related purchased transportation expense and fuel surcharge reimbursement, future growth of our lease-purchase program, future driver market conditions and driver turnover and retention rates, any projections of earnings, revenues, cash flows, dividends, capital expenditures, or other financial items, expected cash flows, expected operating improvements, any statements regarding future economic conditions or performance, any statement of plans, strategies, programs and objectives of management for future operations, including the anticipated impact of such plans, strategies, programs and objectives, future rates and prices, future utilization, future depreciation and amortization, future salaries, wages, and related expenses, including driver compensation, future insurance and claims expense, including the impact of the installation of event recorders, driver training and hair follicle testing, future fluctuations in fuel costs and fuel surcharge revenue, including the future effectiveness of our fuel surcharge program, strategies for managing fuel costs, political conditions and regulations, including trade regulation, quotas, duties or tariffs, and any future changes to the foregoing, future fluctuations in operating expenses and supplies, future fleet size and management, the market value of used equipment, including gain on sale, any statements concerning proposed acquisition plans, new services or developments, the anticipated impact of legal proceedings on our financial position and results of operations, expected progress on internal control remediation efforts, the anticipated effect of the COVID-19 pandemic, among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as “believe,” “may,” “could,” “should,” “expects,” “estimates,” “projects,” “anticipates,” “plans,” “intends,” “outlook,” “strategy,” “target,” “optimistic,” “focus,” “continue,” “will” and similar terms and phrases. Such statements are based on currently available operating, financial and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled “Item 1A. Risk Factors,” set forth in this Form 10-Q and our Annual Report on Form 10‑K for the year ended December 31, 2019. Readers should review and consider the factors discussed in “Item 1A. Risk Factors,” set forth in this Form 10-Q and our Annual Report on Form 10‑K for the year ended December 31, 2019, along with various disclosures in our press releases, stockholder reports, and other filings with the SEC.
All such forward-looking statements speak only as of the date of this Form 10‑Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.
Overview
We are the fifth largest asset‑based truckload carrier in the United States by revenue, generating over $1.7 billion in total operating revenue in 2019. We provide services primarily throughout the United States, with a focus in the densely populated and economically diverse eastern half of the United States. We offer customers a broad portfolio of services using our own truckload fleet and third‑party carriers through our non‑asset‑based truck brokerage network. As of March 31, 2020, our fleet consisted of approximately 6,800 tractors and approximately 15,000 trailers, including approximately 2,000 tractors provided by independent contractors. All of our tractors have been equipped with electronic logs since 2012, and our systems and network are engineered for compliance with the recent federal electronic log mandate. Our terminal network and information technology infrastructure are established and capable of handling significantly larger volumes without meaningful additional investment.
COVID – 19 Business Update
Operational Update
Given the rapid on-set and spread of COVID-19, we moved quickly to enable our office employees to work remotely starting March 16th and during that week transitioned more than 1,400 employees, or over 95% of our corporate office staff, to a work from home environment. Since then, non-remote personnel have largely been limited to employees working on-site at customer locations and shop technicians working in our facilities, all of whom are following strict protocols to ensure their safety.
We have instituted policies to facilitate effective communication in this environment. For non-driving employees, we ensure multiple daily contacts with direct reports and have developed key performance indicators, facilitated by our digital capabilities, to measure our operational effectiveness. We have also implemented a hotline and support staff to ensure employees have access to necessary medical services as well as ensuring an adequate supply of safety equipment, including masks and gloves, for our workers who are on the frontlines, and providing regular cleaning and disinfecting of our facilities. U.S. Xpress’ employees are playing an essential role in the country’s fight against COVID-19 as they work to keep critical supplies moving and store shelves stocked. We are working daily with our drivers to keep them informed and safe in this rapidly changing environment.
To further ensure the safety of our drivers’ and staff, we have instituted mandatory temperature checks for drivers prior to entering our facilities. For new drivers, we have leveraged our new driver training program as well as created a virtual orientation program that allows drivers to complete work remotely and, therefore, avoiding a majority of classroom work. This is an attractive innovation for drivers and has positively contributed to our recruiting efforts.
Market and Customer Update
We have a strong and diversified customer base with our top 25 customers representing 71% of 2019 revenues. At the peak of the COVID-19 crisis, customers representing 96% of our pre-COVID-19 revenues remained operational, and incremental volumes from those customers more than made up for the non-operational customers. We have not seen a drop in total load volume through April; however, we have experienced a sequential decline in spot rates in April compared with the first quarter of 2020.
Liquidity and Capital Resources
Due to uncertainties regarding the depth and duration of the economic impact of the COVID-19 crisis, as well as the impact of re-starting various components of the global supply chain at different times, we have considered many different scenarios, including those that would entail a significant multi-quarter degradation of business conditions across our customer base. Based on this analysis, we are managing the business to prudently control expenses and to ensure adequate liquidity even if operating and financial results are significantly and negatively impacted for an extended period.
We do not anticipate material liquidity constraints or any issues with our ongoing ability to remain in compliance with our Credit Facility.
Executive Summary
For much of our history, we focused primarily on scaling our fleet and expanding our service offerings to support sustainable, multi-faceted relationships with customers. More recently, we have focused on our core service offerings and refined our network to focus on shorter, more profitable lanes with more density, which we believe are more attractive to drivers. We believe we have the strategy, management team, revenue base, modern fleet, and capital structure that position us very well to execute upon our initiatives, drive further operational gains, and deliver long term value for our stockholders. For 2020 we are focused on three main priorities. The first is optimizing our Truckload network and resulting average revenue per tractor per week through repositioning equipment and allocating capacity to our Dedicated service offering from our Over-the-Road (“OTR”) service offering. The second is improving the experience of our professional truck drivers, including their safety and security. And, the third is advancing our technology initiatives centered on digitization of our loads and business, automated load acceptance and prioritization, and our goal of achieving a frictionless order.
Total revenue for the first quarter of 2020 increased by $17.2 million to $432.6 million as compared to the first quarter of 2019. The increase was primarily a result of a 4.2% increase in average tractors, a 9.2% increase in Brokerage revenue to $50.5 million offset by a 2.7% decrease in average revenue per mile. Excluding the impact of fuel surcharge revenue, first quarter revenue increased $17.5 million to $392.8 million, an increase of 4.7% as compared to the prior year quarter.
Operating loss for the first quarter of 2020 was $3.7 million compared to operating income of $12.6 million in the first quarter of 2020. We delivered a 100.8% operating ratio for the quarter which is an increase relative to the 97.0% operating ratio reported in the first quarter of 2019. Our profitability declined largely as a result of our OTR fleet revenue per tractor per week declining 4.2% in the first quarter from $3,616 in 2019 to $3,463 in 2020. This degradation was partially offset by progress in our Dedicated fleet which saw revenue per tractor per week increase 2.7% in the first quarter to $4,068 in 2020 from $3,961 in 2019. In addition, our Brokerage segment saw a decrease in gross margin to 3.7% compared to 17.5% in the prior year quarter.
We are continuing to focus on our driver centric initiatives, such as increased miles and modern equipment, to both retain the professional drivers who have chosen to partner with us and attract new professional drivers to our team. In an effort to improve driver satisfaction we created a new driver development program. This program provides continuous learning opportunities for our drivers with the goal of providing the knowledge, skills and abilities necessary for a successful career. While still early in its implementation, we are seeing positive results from those drivers who have completed this training versus those who have not. We are optimistic that, over time, this training will improve our drivers’ satisfaction and retention while also reducing their accident rate and the Company’s insurance and claims expense. COVID-19 has allowed us to start upgrading our driver fleet as drivers seek out larger and more stable companies like U.S. Xpress. We will continue to focus on implementing and executing our initiatives that we expect will continue to drive sustainable improved performance over time.
Reportable Segments
Our business is organized into two reportable segments, Truckload and Brokerage. Our Truckload segment offers truckload services, including OTR trucking and dedicated contract services. Our OTR service offering transports a full trailer of freight for a single customer from origin to destination, typically without intermediate stops or handling pursuant to short‑term contracts and spot moves that include irregular route moves without volume and capacity commitments. Tractors are operated with a solo driver or, when handling more time‑sensitive, higher‑margin freight, a team of two drivers. Our dedicated contract service offering provides similar freight transportation services, but with contractually assigned equipment, drivers and on‑site personnel to address customers’ needs for committed capacity and service levels pursuant to multi‑year contracts with guaranteed volumes and pricing. Our Brokerage segment is principally engaged in non‑asset‑based freight brokerage services, where loads are contracted to third‑party carriers.
Truckload Segment
In our Truckload segment, we generate revenue by transporting freight for our customers in our OTR and dedicated contract service offerings. Our OTR service offering provides solo and expedited team services through one way movements of freight over routes throughout the United States. Our dedicated contract service offering devotes the use of equipment to specific customers and provides services through long term contracts. Our Truckload segment provides services that are geographically diversified but have similar economic and other relevant characteristics, as they all provide truckload carrier services of general commodities and durable goods to similar classes of customers.
We are typically paid a predetermined rate per load or per mile for our Truckload services. We enhance our revenue by charging for tractor and trailer detention, loading and unloading activities and other specialized services. Consistent with industry practice, our typical customer contracts (other than those contracts in which we have agreed to dedicate certain tractor and trailer capacity for use by specific customers) do not guarantee load levels or tractor availability. This gives us and our customers a certain degree of flexibility to negotiate rates up or down in response to changes in freight demand and trucking capacity. In our dedicated contract service offering, which comprised approximately 41.3% of our Truckload operating revenue, and approximately 42.1% of our Truckload revenue, before fuel surcharge, for 2019, we provide service under contracts with fixed terms, volumes and rates. Dedicated contracts are often used by our customers with high service and high priority freight, sometimes to replace private fleets previously operated by them.
Generally, in our Truckload segment, we receive fuel surcharges on the miles for which we are compensated by customers. Fuel surcharge revenue mitigates the effect of price increases over a negotiated base rate per gallon of fuel; however, these revenues may not fully protect us from all fuel price increases. Our fuel surcharges to customers may not fully recover all fuel increases due to engine idle time, out of route miles and non-revenue generating miles that are not generally billable to the customer, as well as to the extent the surcharge paid by the customer is insufficient. The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of revenue miles we generate. Although our surcharge programs vary by customer, we generally attempt to negotiate an additional penny per mile charge for every five cent increase in the U.S. Department of Energy’s (the “DOE”) national average diesel fuel index over an agreed baseline price. Our fuel surcharges are billed on a lagging basis, meaning we typically bill customers in the current week based on a previous week’s applicable index. Therefore, in times of increasing fuel prices, we do not recover as much as we are currently paying for fuel. In periods of declining prices, the opposite is true. Based on the current status of our empty miles percentage and the fuel efficiency of our tractors, we believe that our fuel surcharge recovery is effective.
The main factors that affect our operating revenue in our Truckload segment are the average revenue per mile we receive from our customers, the percentage of miles for which we are compensated and the number of shipments and miles we generate. Our primary measures of revenue generation for our Truckload segment are average revenue per loaded mile and average revenue per tractor per period, in each case excluding fuel surcharge revenue.
In our Truckload segment, our most significant operating expenses vary with miles traveled and include (i) fuel, (ii) driver related expenses, such as wages, benefits, training and recruitment and (iii) costs associated with independent contractors (which are primarily included in the “Purchased transportation” line item). Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency and other factors. Our main fixed costs include vehicle rent and depreciation of long term assets, such as revenue equipment and service center facilities, the compensation of non-driver personnel and other general and administrative expenses.
Our Truckload segment requires substantial capital expenditures for purchase of new revenue equipment. We use a combination of operating leases and secured financing to acquire tractors and trailers, which we refer to as revenue equipment. When we finance revenue equipment acquisitions with operating leases, we record an operating lease right of use asset and an operating lease liability on our consolidated balance sheet, and the lease payments in respect of such equipment are reflected in our consolidated statement of comprehensive income in the line item “Vehicle rents.” When we finance revenue equipment acquisitions with secured financing, the asset and liability are recorded on our consolidated balance sheet, and we record expense under “Depreciation and amortization” and “Interest expense.” Typically, the aggregate monthly payments are similar under operating lease financing and secured financing. We use a mix of finance
leases and operating leases with individual decisions being based on competitive bids, tax projections and contractual restrictions. Because of the inverse relationship between vehicle rents and depreciation and amortization, we review both line items together.
Approximately 27.1% of our total tractor fleet was operated by independent contractors at March 31, 2020. Independent contractors provide a tractor and a driver and are responsible for all of the costs of operating their equipment and drivers, including interest and depreciation, vehicle rents, driver compensation, fuel and other expenses, in exchange for a fixed payment per mile or percentage of revenue per invoice plus a fuel surcharge pass through. Payments to independent contractors are recorded in the “Purchased transportation” line item. When independent contractors increase as a percentage of our total tractor fleet, our “Purchased transportation” line item typically will increase, with offsetting reductions in employee driver wages and related expenses, net of fuel (assuming all other factors remain equal). The reverse is true when the percentage of our total fleet operated by company drivers increases.
Brokerage Segment
In our Brokerage segment, we retain the customer relationship, including billing and collection, and we outsource the transportation of the loads to third‑party carriers. For this segment, we rely on brokerage employees to procure third‑party carriers, as well as information systems to match loads and carriers.
Our Brokerage segment revenue is mainly affected by the rates we obtain from customers, the freight volumes we ship through our third‑party carriers and our ability to secure third‑party carriers to transport customer freight. We generally do not have contracted long‑term rates for the cost of third‑party carriers, and we cannot assure that our results of operations will not be adversely impacted in the future if our ability to obtain third‑party carriers changes or the rates of such providers increase.
The most significant expense of our Brokerage segment, which is primarily variable, is the cost of purchased transportation that we pay to third‑party carriers, and is included in the “Purchased transportation” line item. This expense generally varies depending upon truckload capacity, availability of third‑party carriers, rates charged to customers and current freight demand and customer shipping needs. Other operating expenses are generally fixed and primarily include the compensation and benefits of non‑driver personnel (which are recorded in the “Salaries, wages and benefits” line item) and depreciation and amortization expense.
The key performance indicator in our Brokerage segment is gross margin percentage (which is calculated as Brokerage revenue less purchased transportation expense expressed as a percentage of total operating revenue). Gross margin percentage can be impacted by the rates charged to customers and the costs of securing third‑party carriers.
Our Brokerage segment does not require significant capital expenditures and is not asset intensive like our Truckload segment.
Results of Operations
Revenue
We generate revenue from two primary sources: transporting freight for our customers (including related fuel surcharge revenue) and arranging for the transportation of customer freight by third‑party carriers. We have two reportable segments: our Truckload segment and our Brokerage segment. Truckload revenue, before fuel surcharge and truckload fuel surcharge are primarily generated through trucking services provided by our two Truckload service offerings (OTR and dedicated contract). Brokerage revenue is primarily generated through brokering freight to third‑party carriers.
Our total operating revenue is affected by certain factors that relate to, among other things, the general level of economic activity in the United States, customer inventory levels, specific customer demand, the level of capacity in the truckload and brokerage industry, the success of our marketing and sales efforts and the availability of drivers, independent contractors and third‑party carriers.
A summary of our revenue generated by type for the three months ended March 31, 2020 and 2019 is as follows:
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|
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|
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Three Months Ended
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|
|
|
March 31,
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|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
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|
Revenue, before fuel surcharge
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|
$
|
392,820
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|
$
|
375,312
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|
Fuel surcharge
|
|
|
39,748
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|
|
40,051
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|
Total operating revenue
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|
$
|
432,568
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|
$
|
415,363
|
For the quarter ended March 31, 2020, our total operating revenue increased by $17.2 million, or 4.1%, compared to the same quarter in 2019, and our revenue, before fuel surcharge increased by $17.5 million, or 4.7%. The primary factors driving the increases in total operating revenue and revenue, before fuel surcharge, were increased volumes in our Truckload and Brokerage segment, offset partially by decreased pricing.
To date volumes have remained above 30,000 per week, however we are seeing a sequential reduction in our spot market rates and we are uncertain as to when the market will recover as a result of the COVID-19 pandemic.
A summary of our revenue generated by segment for the three months ended March 31, 2020 and 2019 is as follows:
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Three Months Ended
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March 31,
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2020
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|
2019
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|
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|
(dollars in thousands)
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Truckload revenue, before fuel surcharge
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$
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342,344
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|
$
|
329,068
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Fuel surcharge
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|
|
39,748
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|
|
40,051
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Total Truckload operating revenue
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|
382,092
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|
|
369,119
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Brokerage operating revenue
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50,476
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|
|
46,244
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Total operating revenue
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|
$
|
432,568
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|
$
|
415,363
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The following is a summary of our key Truckload segment performance indicators, before fuel surcharge for the three months ended March 31, 2020 and 2019.
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Three Months Ended
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March 31,
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2020
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2019
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|
Over the road
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|
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Average revenue per tractor per week
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$
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3,463
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|
$
|
3,616
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Average revenue per mile
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|
$
|
1.871
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|
$
|
1.985
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Average revenue miles per tractor per week
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|
|
1,851
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|
|
1,822
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Average tractors
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|
|
3,835
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|
|
3,617
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Dedicated
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|
|
|
|
|
|
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Average revenue per tractor per week
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|
$
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4,068
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|
$
|
3,961
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|
Average revenue per mile
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|
$
|
2.376
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|
$
|
2.337
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Average revenue miles per tractor per week
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|
|
1,712
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|
|
1,695
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Average tractors
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|
|
2,703
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|
|
2,658
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Consolidated
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Average revenue per tractor per week
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$
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3,713
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|
$
|
3,762
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Average revenue per mile
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|
$
|
2.070
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|
$
|
2.128
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Average revenue miles per tractor per week
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|
|
1,794
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|
|
1,768
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Average tractors
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|
|
6,538
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|
|
6,275
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For the quarter ended March 31, 2020, our Truckload revenue, before fuel surcharge increased by $13.3 million, or 4.0%, compared to the same quarter in 2019. The primary factors driving the changes in Truckload revenue, were a
4.2% increase of average available tractors, a 1.5% increase in average revenue miles per tractor per week offset by a 2.7% decrease in average revenue per mile. During the quarter ended March 31, 2020, our OTR rates decreased 5.7% due primarily to spot market rates declining more than 10% compared to the same quarter in 2019. Our Dedicated rates increased 1.7% during the quarter ended March 31, 2020 as compared to the same period in 2019. Fuel surcharge revenue decreased by $0.3 million, or 0.8%, to $39.7 million, compared with $40.1 million in the same quarter in 2019. The Department of Energy (“DOE”) national weekly average fuel price per gallon averaged approximately $0.104 per gallon lower for the quarter ended March 31, 2020 compared to the same quarter in 2019. The decrease in fuel surcharge revenue primarily relates to decreased fuel prices partially offset by a 7.1% increase in revenue miles compared to the same quarter in 2019.
The key performance indicator of our Brokerage segment is gross margin percentage (Brokerage revenue less purchased transportation expense expressed as a percentage of total operating revenue). Gross margin percentage can be impacted by the rates charged to customers and the costs of securing third‑party carriers. The following table lists the gross margin percentage for our Brokerage segment for the three months ended March 31, 2020 and 2019.
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Three Months Ended
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March 31,
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2020
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2019
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Gross margin percentage
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3.7
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%
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17.5
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%
|
For the quarter ended March 31, 2020, our Brokerage revenue increased by $4.2 million, or 9.2%, compared to the same quarter in 2019. The primary factor driving the increase in Brokerage revenue was a 28.6% increase in load count offset by a 15.1% decrease in average revenue per load. We experienced a decrease in our gross margin to 3.7% in the first quarter of 2020 compared to 17.5% due to a $207 decrease in revenue per load partially offset by a $10 decrease in cost per load compared to the same quarter in 2019. We continue to work on improving our gross margin in this segment.
Operating Expenses
For comparison purposes in the discussion below, we use total operating revenue and revenue, before fuel surcharge when discussing changes as a percentage of revenue. As it relates to the comparison of expenses to revenue, before fuel surcharge, we believe that removing fuel surcharge revenue, which is sometimes a volatile source of revenue affords a more consistent basis for comparing the results of operations from period‑to‑period.
Individual expense line items as a percentage of total operating revenue also are affected by fluctuations in the percentage of our revenue generated by independent contractor and brokerage loads.
Salaries, Wages and Benefits
Salaries, wages and benefits consist primarily of compensation for all employees. Salaries, wages and benefits are primarily affected by the total number of miles driven by company drivers, the rate per mile we pay our company drivers, employee benefits such as health care and workers’ compensation, and to a lesser extent by the number of, and compensation and benefits paid to, non‑driver employees.
The following is a summary of our salaries, wages and benefits for the three months ended March 31, 2020 and 2019:
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Three Months Ended
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|
|
March 31,
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|
|
2020
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|
2019
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|
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(dollars in thousands)
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Salaries, wages and benefits
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|
$
|
135,394
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|
$
|
124,563
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% of total operating revenue
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|
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31.3
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%
|
|
30.0
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%
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|
% of revenue, before fuel surcharge
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|
|
34.5
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%
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|
33.2
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%
|
For the quarter ended March 31, 2020, salaries, wages and benefits increased $10.8 million, or 8.7%, compared with the same quarter in 2019. The increases in absolute dollar terms were due primarily to $6.2 million of higher driver wages due in part to a 3.8% increase in company driver miles combined with increased driver pay per mile and a $2.7 million increase in office wages due in part to a 5.3% increase in headcount as we continue to invest in our ongoing initiatives. Our OTR driver pay on a per mile basis increased as a result of higher incentive-based pay as compared to the same quarter in 2019. During the three months ended March 31, 2020, our workers’ compensation expense and group health claims expense increased approximately 25.1%, due to increased group health claims expense and increased workers’ compensation claims as compared to the same quarter in 2019.
Fuel and Fuel Taxes
Fuel and fuel taxes consist primarily of diesel fuel expense and fuel taxes for our company‑owned and leased tractors. The primary factors affecting our fuel and fuel taxes expense are the cost of diesel fuel, the miles per gallon we realize with our equipment and the number of miles driven by company drivers.
We believe that the most effective protection against net fuel cost increases in the near term is to maintain an effective fuel surcharge program and to operate a fuel‑efficient fleet by incorporating fuel efficiency measures, such as auxiliary heating units, installation of aerodynamic devices on tractors and trailers and low‑rolling resistance tires on our tractors, engine idle limitations and computer‑optimized fuel‑efficient routing of our fleet.
The following is a summary of our fuel and fuel taxes for the three months ended March 31, 2020 and 2019:
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Three Months Ended
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|
March 31,
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2020
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2019
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(dollars in thousands)
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Fuel and fuel taxes
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|
$
|
40,323
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$
|
46,904
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% of total operating revenue
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|
|
9.3
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%
|
|
11.3
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%
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|
% of revenue, before fuel surcharge
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|
|
10.3
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%
|
|
12.5
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%
|
For the quarter ended March 31, 2020, fuel and fuel taxes decreased $6.6 million, or 14.0%, compared with the same quarter in 2019. The decrease in fuel and fuel taxes was primarily the result of a 10.6% decrease in the average fuel price per gallon, a 5.5% increase in average miles per gallon, offset by a 3.8% increase in company driver miles compared to the same quarter in 2019.
To measure the effectiveness of our fuel surcharge program, we calculate “net fuel expense” by subtracting fuel surcharge revenue (other than the fuel surcharge revenue we reimburse to independent contractors, which is included in purchased transportation) from our fuel expense. Our net fuel expense as a percentage of revenue, before fuel surcharge, is affected by the cost of diesel fuel net of surcharge collection, the percentage of miles driven by company tractors and our percentage of non‑revenue generating miles, for which we do not receive fuel surcharge revenues. Net fuel expense as a percentage of revenue, before fuel surcharge, is shown below:
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|
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|
|
|
|
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|
|
March 31,
|
|
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|
|
2020
|
|
2019
|
|
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|
|
(dollars in thousands)
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|
|
Total fuel surcharge revenue
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|
$
|
39,748
|
|
$
|
40,051
|
|
|
Less: fuel surcharge revenue reimbursed to independent contractors
|
|
|
11,211
|
|
|
10,480
|
|
|
Company fuel surcharge revenue
|
|
|
28,537
|
|
|
29,571
|
|
|
Total fuel and fuel taxes
|
|
$
|
40,323
|
|
$
|
46,904
|
|
|
Less: company fuel surcharge revenue
|
|
|
28,537
|
|
|
29,571
|
|
|
Net fuel expense
|
|
$
|
11,786
|
|
$
|
17,333
|
|
|
% of total operating revenue
|
|
|
2.7
|
%
|
|
4.2
|
%
|
|
% of revenue, before fuel surcharge
|
|
|
3.0
|
%
|
|
4.6
|
%
|
For the quarter ended March 31, 2020, net fuel expense decreased $5.5 million, or 32.0%, compared with the same quarter in 2019. During the quarter ended March 31, 2020, the decrease in net fuel expenses was primarily the result of a 10.6% decrease in the average fuel price per gallon, a 5.5% increase in average miles per gallon, offset by a 3.8% increase in company driver miles compared to the same quarter in 2019.
In the near term, our net fuel expense is expected to fluctuate as a percentage of total operating revenue and revenue, before fuel surcharge, based on factors such as diesel fuel prices, the percentage recovered from fuel surcharge programs, the percentage of uncompensated miles, the percentage of revenue generated by independent contractors, the percentage of revenue generated by team‑driven tractors (which tend to generate higher miles and lower revenue per mile, thus proportionately more fuel cost as a percentage of revenue).
Vehicle Rents and Depreciation and Amortization
Vehicle rents consist primarily of payments for tractors and trailers financed with operating leases. The primary factors affecting this expense item include the size and age of our tractor and trailer fleets, the cost of new equipment and the relative percentage of owned versus leased equipment.
Depreciation and amortization consists primarily of depreciation for owned tractors and trailers. The primary factors affecting these expense items include the size and age of our tractor and trailer fleets, the cost of new equipment and the relative percentage of owned equipment and equipment acquired through debt or finance leases versus equipment leased through operating leases. We use a mix of finance leases and operating leases to finance our revenue equipment with individual decisions being based on competitive bids and tax projections. Gains or losses realized on the sale of owned revenue equipment are included in depreciation and amortization for reporting purposes.
Vehicle rents and depreciation and amortization are closely related because both line items fluctuate depending on the relative percentage of owned equipment and equipment acquired through finance leases versus equipment leased through operating leases. Vehicle rents increase with greater amounts of equipment acquired through operating leases, while depreciation and amortization increases with greater amounts of owned equipment and equipment acquired through finance leases. Because of the inverse relationship between vehicle rents and depreciation and amortization, we review both line items together.
The following is a summary of our vehicle rents and depreciation and amortization for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(dollars in thousands)
|
|
|
Vehicle rents
|
|
$
|
21,877
|
|
$
|
18,976
|
|
|
Depreciation and amortization, net of (gains) losses on sale of property
|
|
|
25,803
|
|
|
23,062
|
|
|
Vehicle rents and depreciation and amortization of property and equipment
|
|
$
|
47,680
|
|
$
|
42,038
|
|
|
% of total operating revenue
|
|
|
11.0
|
%
|
|
10.1
|
%
|
|
% of revenue, before fuel surcharge
|
|
|
12.1
|
%
|
|
11.2
|
%
|
For the quarter ended March 31, 2020, vehicle rents increased $2.9 million or 15.3% compared to the same quarter in 2019. The increase in vehicle rents was primarily due to increased trailers and tractors financed under operating leases compared to the same quarter in 2019. Depreciation and amortization, net of (gains) losses on sale of property and equipment increased $2.7 million, or 11.9%, compared to the same quarter in 2019. The increase in depreciation and amortization is primarily due to increased losses on sale of revenue equipment combined with increased software amortization as compared to the same quarter in 2019.
We continue to evaluate our planned capital expenditures and now estimate 2020 net capital expenditures to approximate $100.0 to $120.0 million, which includes an approximate $20.0 million transaction that carried over from the fourth quarter of 2019. The reduction from our prior estimate relates primarily to a deferral of a small quantity of planned tractor replacements combined with a reduction in the planned number of new trailer deliveries for the balance of the year. We expect to finance 100% of the acquisition price of new revenue equipment capital expenditures with finance leases or secured equipment notes, with no use of cash or borrowings under our Credit Facility. We will continue to monitor market conditions and may further reduce our planned capital expenditures as necessary.
Purchased Transportation
Purchased transportation consists of the payments we make to independent contractors, including fuel surcharge reimbursements paid to independent contractors, in our Truckload segment, and payments to third‑party carriers in our Brokerage segment.
The following is a summary of our purchased transportation for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(dollars in thousands)
|
|
|
Purchased transportation
|
|
$
|
129,754
|
|
$
|
114,005
|
|
|
% of total operating revenue
|
|
|
30.0
|
%
|
|
27.4
|
%
|
|
% of revenue, before fuel surcharge
|
|
|
33.0
|
%
|
|
30.4
|
%
|
For the quarter ended March 31, 2020, purchased transportation increased $15.7 million, or 13.8%, compared to the same quarter in 2019. The increase in purchased transportation was partially due to a 28.6% increase in our Brokerage load count combined with a 18.2% increase in independent contractor miles as compared to the same quarter in 2019.
Because we reimburse independent contractors for fuel surcharges we receive, we subtract fuel surcharge revenue reimbursed to them from our purchased transportation. The result, referred to as purchased transportation, net of fuel surcharge reimbursements, is evaluated as a percentage of total operating revenue and as a percentage of revenue, before fuel surcharge, as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(dollars in thousands)
|
|
|
Purchased transportation
|
|
$
|
129,754
|
|
$
|
114,005
|
|
|
Less: fuel surcharge revenue reimbursed to independent contractors
|
|
|
11,211
|
|
|
10,480
|
|
|
Purchased transportation, net of fuel surcharge reimbursement
|
|
$
|
118,543
|
|
$
|
103,525
|
|
|
% of total operating revenue
|
|
|
27.4
|
%
|
|
24.9
|
%
|
|
% of revenue, before fuel surcharge
|
|
|
30.2
|
%
|
|
27.6
|
%
|
For the quarter ended March 31, 2020, purchased transportation, net of fuel surcharge reimbursement, increased $15.0 million, or 14.5%, compared to the same quarter in 2019. The increase in purchased transportation was partially due a 28.6% increase in our Brokerage load count combined with a 18.2% increase in independent contractor miles as compared to the same quarter in 2019.
Operating Expenses and Supplies
Operating expenses and supplies consist primarily of ordinary vehicle repairs and maintenance costs, driver on‑the‑road expenses, tolls and advertising expenses related to driver recruiting. Operating expenses and supplies are
primarily affected by the age of our company‑owned and leased fleet of tractors and trailers, the number of miles driven in a period and driver turnover.
The following is a summary of our operating expenses and supplies for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(dollars in thousands)
|
|
|
Operating expenses and supplies
|
|
$
|
29,674
|
|
$
|
27,945
|
|
|
% of total operating revenue
|
|
|
6.9
|
%
|
|
6.7
|
%
|
|
% of revenue, before fuel surcharge
|
|
|
7.6
|
%
|
|
7.4
|
%
|
For the quarter ended March 31, 2020, operating expenses and supplies increased $1.7 million, or 6.2%, compared to the same quarter in 2019. The increase was primarily due to increased incidental maintenance expenses related to our higher turnover as compared to the same quarter in 2019.
Insurance Premiums and Claims
Insurance premiums and claims consists primarily of retained amounts for liability (personal injury and property damage), physical damage and cargo damage, as well as insurance premiums. The primary factors affecting our insurance premiums and claims are the frequency and severity of accidents, trends in the development factors used in our actuarial accruals and developments in large, prior year claims. The number of accidents tends to increase with the miles we travel. With our significant retained amounts, insurance claims expense may fluctuate significantly and impact the cost of insurance premiums and claims from period‑to‑period, and any increase in frequency or severity of claims or adverse loss development of prior period claims would adversely affect our financial condition and results of operations.
The following is a summary of our insurance premiums and claims expense for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(dollars in thousands)
|
|
|
Insurance premiums and claims
|
|
$
|
26,023
|
|
$
|
24,353
|
|
|
% of total operating revenue
|
|
|
6.0
|
%
|
|
5.9
|
%
|
|
% of revenue, before fuel surcharge
|
|
|
6.6
|
%
|
|
6.5
|
%
|
For the quarter ended March 31, 2020, insurance premiums and claims increased $1.7 million, or 6.9%, compared to the same quarter in 2019. This increase is primarily due to increased liability expense partially offset by decreased physical damage claims expense as we did not experience the same frequency of physical damage claims as compared to the same quarter in 2019. Our increase in liability expense was due primarily to a 7.8% increase in total miles while cost per mile remained essentially constant.
Since the second quarter of 2018, substantially all of the tractors in our fleet have been equipped with event recorders. We continue to believe we have an opportunity to reduce our claims expense over time as a result of (1) having completed the installation of event recorders in 2018, (2) the successful launch of our redeveloped driver training facilities, and (3) our decision to implement hair follicle testing for all of our drivers in the fourth quarter of 2019. While we have not yet seen measurable financial results from these initiatives, we believe our increase in expense in 2020 relative to 2019 would have been greater absent the combination of the above initiatives.
General and Other Operating Expenses
General and other operating expenses consist primarily of driver recruiting costs, legal and professional services fees, general and administrative expenses and other costs.
The following is a summary of our general and other operating expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(dollars in thousands)
|
|
|
General and other operating expenses
|
|
$
|
21,259
|
|
$
|
17,479
|
|
|
% of total operating revenue
|
|
|
4.9
|
%
|
|
4.2
|
%
|
|
% of revenue, before fuel surcharge
|
|
|
5.4
|
%
|
|
4.7
|
%
|
For the quarter ended March 31, 2020, general and other operating expenses increased $3.8 million, or 21.6%, compared to the same quarter in 2019. General and other expenses increased primarily due to higher driver hiring costs and other driver related expenses combined with increased terminal rents due to the sale leaseback transaction in the fourth quarter of 2019.
Liquidity and Capital Resources
Overview
Our business requires substantial amounts of cash to cover operating expenses as well as to fund capital expenditures, working capital changes, principal and interest payments on our obligations, lease payments, letters of credit to support insurance requirements and tax payments when we generate taxable income. Recently, we have financed our capital requirements with borrowings under our Credit Facility, cash flows from operating activities, direct equipment financing, finance leases, operating leases and proceeds from equipment sales.
We believe we can fund our expected cash needs, including debt repayment, in the short‑term with projected cash flows from operating activities, borrowings under our Credit Facility and direct debt and lease financing we believe to be available for at least the next 12 months. Over the long‑term, we expect that we will continue to have significant capital requirements, which may require us to seek additional borrowings, lease financing or equity capital. We have obtained a significant portion of our revenue equipment under operating leases, which are not reflected as net capital expenditures. The availability of financing and equity capital will depend upon our financial condition and results of operations as well as prevailing market conditions.
At March 31, 2020, we had approximately $32.7 million of outstanding letters of credit, $77.0 million in outstanding borrowings and $90.6 million of availability under our $250.0 million Credit Facility.
Due to uncertainties regarding the depth and duration of the economic impact of the COVID-19 crisis, as well as the impact of re-starting various components of the global supply chain at different times, we have considered many different scenarios, including those that would entail a significant multi-quarter degradation of business conditions across our customer base. Based on this analysis, we are managing the business to prudently control expenses and to ensure adequate liquidity even if operating and financial results are significantly and negatively impacted for an extended period.
Sources of Liquidity
Credit Facility
On January 28, 2020, we entered into the Credit Facility and contemporaneously with the funding of the Credit Facility paid off obligations under our then existing credit facility and terminated such facility. The Credit Facility is a $250.0 million revolving credit facility, with an uncommitted accordion feature that, so long as no event of default exists, allows the Company to request an increase in the revolving credit facility of up to $75.0 million.
The Credit Facility is a five-year facility scheduled to terminate on January 28, 2025. Borrowings under the Credit Facility are classified as either “base rate loans” or “eurodollar rate loans”. Base rate loans accrue interest at a base rate equal to the highest of (A) the Federal Funds Rate plus 0.50%, (B) the Agent’s prime rate, and (C) LIBOR plus 1.00% plus an applicable margin that is set at 0.50% through June 30, 2020 and adjusted quarterly thereafter between 0.25% and 0.75% based on the ratio of the daily average availability under the Credit Facility to the daily average of the lesser of the borrowing base or the revolving credit facility. Eurodollar rate loans accrue interest at LIBOR plus an applicable margin that is set at 1.50% through June 30, 2020 and adjusted quarterly thereafter between 1.25% and 1.75% based on the ratio of the daily average availability under the Credit Facility to the daily average of the lesser of the borrowing base or the revolving credit facility. The Credit Facility includes, within its $250.0 million revolving credit facility, a letter of credit sub-facility in an aggregate amount of $75.0 million and a swingline sub-facility in an aggregate amount of $25.0 million. An unused line fee of 0.25% is applied to the average daily amount by which the lenders’ aggregate revolving commitments exceed the outstanding principal amount of revolver loans and aggregate undrawn amount of all outstanding letters of credit issued under the Credit Facility. The Credit Facility is secured by a pledge of substantially all of the Company’s assets, excluding, among other things, any real estate or revenue equipment financed outside the Credit Facility.
Borrowings under the Credit Facility are subject to a borrowing base limited to the lesser of (A) $250.0 million; or (B) the sum of (i) 87.5% of eligible billed accounts receivable, plus (ii) 85.0% of eligible unbilled accounts receivable (less than 30 days), plus (iii) 85.0% of the net orderly liquidation value percentage applied to the net book value of eligible revenue equipment, plus (iv) the lesser of (a) 80.0% the fair market value of eligible real estate or (b) $25.0 million. The Credit Facility contains a single springing financial covenant, which requires a consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The financial covenant is tested only in the event excess availability under the Credit Facility is less than the greater of (A) 10.0% of the lesser of the borrowing base or revolving credit facility or (B) $20.0 million.
The Credit Facility includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the Credit Facility may be accelerated, and the lenders’ commitments may be terminated. The Credit Facility contains certain restrictions and covenants relating to, among other things, dividends, liens, acquisitions and dispositions, affiliate transactions, and other indebtedness.
At March 31, 2020, the Credit Facility had issued collateralized letters of credit in the face amount of $32.7 million, with $77.0 million borrowings outstanding and $90.6 million available to borrow. We do not anticipate material liquidity constraints or any issues with our ongoing ability to remain in compliance with our Credit Facility.
Cash Flows
Our summary statements of cash flows for the three months ended March 31, 2020 and 2019 are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Net cash provided by operating activities
|
|
$
|
20,078
|
|
$
|
25,479
|
|
Net cash used in investing activities
|
|
$
|
(69,111)
|
|
$
|
(32,491)
|
|
Net cash (used in) provided by financing activities
|
|
$
|
48,972
|
|
$
|
(12,569)
|
Operating Activities
For the three months ended March 31, 2020, we generated cash flows from operating activities of $20.1 million, a decrease of $5.4 million compared to the same period in 2019. The decrease was due primarily to a decrease of $12.5 million in net income adjusted for noncash items offset by a $7.1 million decrease in our operating assets and liabilities. Our operating assets and liabilities decreased $7.1 million during the three months ended March 31, 2020 as compared to the same period in 2019, due in part to increased accounts receivable collections, and decreased payments for accounts payable and other accrued liabilities partially offset by an increase in accrued wages and benefit payments related to timing of payments. Our decrease in net income adjusted for noncash items was due in part to decreased revenue per mile combined with the decrease in our Brokerage gross margin.
Investing Activities
For the three months ended March 31, 2020, net cash flows used in investing activities were $69.1 million, an increase of $36.6 million compared to the same period in 2019. This increase is primarily the result of increased revenue equipment purchases of which a part was a carryover from our 2019 planned capital expenditures. We expect our net capital expenditures for calendar year 2020 will approximate $100.0 million to $120.0 million and will be 100% financed with secured equipment notes or finance leases and will not require any use of cash or borrowings under our Credit Facility.
Financing Activities
For the three months ended March 31, 2020, net cash flows provided by financing activities were $49.0 million, an increase of $61.5 million compared to the same period in 2019. The increase is primarily due to $81.4 million of new borrowings related to existing fixed assets of which a portion was used to pay down our terminated term loan.
Working Capital
As of March 31, 2020, we had a working capital deficit of $49.9 million, representing an $8.3 million decrease in our working capital from March 31, 2019. When we analyze our working capital, we typically exclude balloon payments in the current maturities of long-term debt as these payments are typically either funded with the proceeds from equipment sales or addressed by extending the maturity of such payments. We believe this facilitates a more meaningful analysis of our changes in working capital from period-to-period. Excluding balloon payments included in current maturities of long-term debt as of March 31, 2020, we had a working capital deficit of $26.1 million, compared with a working capital surplus of $3.4 million at March 31, 2019. The decrease in working capital was primarily the result of increased accounts payable and the current portion of operating leases offset by increased assets held for sale.
Working capital deficits are common to many trucking companies that operate by financing revenue equipment purchases through borrowing, or lease arrangements. When we finance revenue equipment through borrowing or lease arrangements, the principal amortization or, in the case of operating leases, the present value of the lease payments scheduled for the next twelve months, is categorized as a current liability, although the revenue equipment and operating lease right of use assets are classified as long-term assets. Consequently, each acquisition of revenue equipment financed with borrowing, or lease arrangements decreases working capital. We believe a working capital deficit has little impact on our liquidity. Based on our expected financial condition, net capital expenditures, results of operations, related net cash flows, installment notes, and other sources of financing, we believe our working capital and sources of liquidity will be adequate to meet our current and projected needs and we do not expect to experience material liquidity constraints in the foreseeable future.
Off-Balance Sheet Arrangements
The Company had letters of credit of $32.7 million outstanding as of March 31, 2020. The letters of credit are maintained primarily to support the Company’s insurance program.
The Company had cancelable commitments outstanding at March 31, 2020 to acquire revenue equipment for approximately $65.8 million during the remainder of 2020. These purchase commitments are expected to be financed by operating leases, long-term debt and proceeds from sales of existing equipment.
Seasonality
In the trucking industry, revenue has historically decreased as customers reduce shipments following the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses have generally increased, with fuel efficiency declining because of engine idling and weather, causing more physical damage equipment repairs and insurance claims and costs. For the reasons stated, first quarter results historically have been lower than results in each of the other three quarters of the year. However, cyclical changes in the trucking industry, including imbalances in supply and demand, can override the seasonality faced in the industry. Over the past several years, we have seen increases in demand at varying times, including surges between Thanksgiving and the year‑end holiday season.
Contractual Obligations
The table below summarizes our contractual obligations as of March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 year
|
|
1 ‑ 3 years
|
|
3 ‑ 5 years
|
|
5 years
|
|
Total
|
|
|
|
(in thousands)
|
|
Long‑term debt obligations(1)
|
|
$
|
95,175
|
|
$
|
190,607
|
|
$
|
158,418
|
|
$
|
44,115
|
|
$
|
488,315
|
|
Finance lease obligations(2)
|
|
|
2,804
|
|
|
5,261
|
|
|
1,363
|
|
|
—
|
|
|
9,428
|
|
Operating lease obligations(3)
|
|
|
78,626
|
|
|
135,208
|
|
|
62,099
|
|
|
38,054
|
|
|
313,987
|
|
Purchase obligations(4)
|
|
|
65,804
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65,804
|
|
Total contractual obligations(5)
|
|
$
|
242,409
|
|
$
|
331,076
|
|
$
|
221,880
|
|
$
|
82,169
|
|
$
|
877,534
|
(1)Including interest obligations on long-term debt, excluding fees. The table assumes long-term debt is held to maturity and does not reflect events subsequent to March 31, 2020.
(2)Including interest obligations on finance lease obligations.
(3)We lease certain revenue and service equipment and office and service center facilities under long-term, non-cancelable operating lease agreements expiring at various dates through December 2034. Revenue equipment lease terms are generally three to five years for tractors and five to eight years for trailers. The lease terms and any subsequent extensions generally represent the estimated usage period of the equipment, which is generally substantially less than the economic lives. Certain revenue equipment leases provide for guarantees by us of a portion of the specified residual value at the end of the lease term. The maximum potential amount of future payments (undiscounted) under these guarantees is approximately $96.4 million at March 31, 2020. The residual value of a portion of the related leased revenue equipment is covered by repurchase or trade agreements between us and the equipment manufacturer.
(4)We had commitments outstanding at March 31, 2020 to acquire revenue equipment. The revenue equipment commitments are cancelable, subject to certain adjustments in the underlying obligations and benefits. These purchase commitments are expected to be financed by operating leases, long-term debt, proceeds from sales of existing equipment and cash flows from operating activities.
(5)Excludes deferred taxes and long or short-term portion of self-insurance claims accruals.
Critical Accounting Policies
We have reviewed our critical accounting policies and considered whether any new critical accounting estimates or other significant changes to our accounting policies require any additional disclosures. There have been no significant
changes to our accounting policies since the disclosures made in our Annual Report on Form 10‑K for the year ended December 31, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks have not changed materially from the market risks reported in our Annual Report on Form 10‑K for the year ended December 31, 2019.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of March 31, 2020. This evaluation is performed to determine if our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Due to the material weakness described below and the Company’s evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were not effective to provide reasonable assurance as of March 31, 2020.
Material Weakness in Internal Control over Financial Reporting
As described in our Annual Report on Form 10‑K for the year ended December 31, 2019, during the course of preparing for our IPO, we identified material weaknesses in our internal control over financial reporting, one of which continues to exist as of March 31, 2020. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We did not design effective information technology general computer controls with respect to program development, change management, computer operation, and user access to programs and data. This deficiency did not result in a material misstatement to our annual or interim consolidated financial statements. However, this deficiency could result in misstatements potentially impacting all financial statement accounts and disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
Remediation Efforts and Status of Remaining Material Weakness
During 2019, we implemented new or enhanced existing controls governing program development, change management, computer operations, and user access to programs and data. However, we believe additional time is needed to demonstrate the sustainability and effectiveness of the established controls before concluding on remediation.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended March 31, 2020, there were no material changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.