UNITED
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AND EXCHANGE COMMISSION
Washington,
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SCHEDULE
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Preliminary Proxy Statement
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Definitive Proxy Statement
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Soliciting Material Under Rule 14a-12
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FORWARD AIR CORPORATION
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(Name of Registrant as Specified in Its Charter)
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ANCORA CATALYST INSTITUTIONAL, LP
ANCORA CATALYST, LP
ANCORA MERLIN INSTITUTIONAL, LP
ANCORA MERLIN, LP
ANCORA CATALYST SPV I LP – SERIES I
ANCORA CATALYST SPV I LP – SERIES J
ANCORA CATALYST SPV I LP – SERIES K
ANCORA CATALYST SPV I LP – SERIES L
ANCORA CATALYST SPV I SPC LTD. – SEGREGATED
PORTFOLIO E
ANCORA ADVISORS, LLC
ANCORA ALTERNATIVES LLC
ANCORA FAMILY WEALTH ADVISORS, LLC
THE ANCORA GROUP INC.
INVERNESS HOLDINGS LLC
ANCORA HOLDINGS INC.
FREDERICK DISANTO
JAMES M. CHADWICK
ANDREW C. CLARKE
DAWN GARIBALDI
SCOTT M. NISWONGER
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Ancora Catalyst
Institutional, LP, together with the other participants named herein (collectively, “Ancora”), intends to file a preliminary
proxy statement and accompanying WHITE proxy card with the Securities and Exchange Commission (“SEC”) to be used to
solicit votes for the election of its slate of highly-qualified director nominees at the 2021 annual meeting of shareholders of
Forward Air Corporation, a Tennessee corporation (the “Company”).
On February 10, 2021, Ancora issued the following press release, which includes the full text of its open letter to the Company’s
shareholders.
ANCORA NOMINATES FOUR HIGHLY QUALIFIED
CANDIDATES FOR ELECTION TO THE BOARD OF FORWARD AIR CORPORATION
Makes Compelling Case for Change by Exposing Forward Air’s Poor Capital Allocation Decisions, Deteriorating Operating
Performance, Underperformance Relative to Peers and the Perceived Misalignment of Interests Between the Board and Shareholders
Provides Overview of Strategy to Enhance Shareholder Value
Announces Director Slate Including Forward Air’s Founder (Scott M. Niswonger) and Former CFO and Industry Executive (Andrew
C. Clarke) along with James Chadwick and Dawn Garibaldi
CLEVELAND, February 10, 2021 - Ancora Holdings,
Inc. (together with its affiliates, “Ancora” or “we”), a significant shareholder of Forward Air Corporation
(“Forward Air” or the “Company”) (NASDAQ: FWRD), which together with the other participants in its solicitation
beneficially owns approximately 6.3% of the Company’s outstanding shares, today issued an open letter to shareholders and
announced that it has nominated a slate of four highly qualified candidates – James Chadwick, Andrew C. Clarke, Dawn Garibaldi
and Scott M. Niswonger – for election to the Board of Directors (the “Board”) at the Company’s 2021 Annual
Meeting of Shareholders (the “Annual Meeting”).
Ancora believes that Forward Air has the potential
to be a best-in-class asset-light transportation company given that it operates one of the largest linehaul networks in North America
and has exposure to some of the most coveted segments of the transportation and logistics industry. Unfortunately, in Ancora’s
view, the Company has been hampered by a Board that has provided poor operational oversight, pursued an ineffective capital allocation
strategy focused on acquisitions of margin- and return-dilutive service offerings, and failed to optimize the Company’s balance
sheet.
For far too long we believe the Company’s
shareholders have suffered from Forward Air’s:
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Poor Capital Allocation and Declining ROIC. The Company’s leadership team has deployed
nearly $1 billion on acquisitions and capital expenditures combined since 2007 while executing on a growth strategy focused largely
on new service offerings which have been margin and return dilutive to the core business. As a result, ROIC has been cut in half
from ~30% to ~15% during this time period. During our nominee Mr. Clarke’s previous tenure at Forward Air as CFO (2001-2006),
ROIC averaged ~39%.
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Significant Margin Deterioration in Core Expedited LTL. Despite significant top-line growth,
a lack of operating discipline, in our view, has resulted in the core Expedited LTL operating ratio (“OR”) deteriorating
~350 bps since 2014 (and ~675 bps since 2011) as substantial operating expense growth has driven declines in EBIT per ton/shipment
over this time period.
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Lackluster Relative Operating Performance. LTL peers have seen ORs improve ~600 bps on average
since 2014 compared to a ~350 bps deterioration for Forward Air’s core Expedited LTL business, representing a ~950 bps delta
in operating performance over the past five years.
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Underperformance Relative to Peers. Since 2007, (i) Old Dominion’s (NASDAQ: ODFL)
EBITDA has increased at ~15% CAGR with ROIC more than doubling and the stock is up ~30x, (ii) Saia’s (NASDAQ: SAIA) EBITDA
has increased at ~11% CAGR with ROIC nearly doubling and the stock is up ~22x, and (iii) Forward Air’s EBITDA has increased
at a ~3% CAGR with ROIC getting cut in half and the stock up only ~1.5x.
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Inadequate Execution by Management. FY 2020 results have substantially underperformed peers
as core Expedited LTL OR has deteriorated ~400 bps year-over-year with EBITDA down ~35% year-over-year and diluted EPS (ex-Pool
Distribution) down ~25% year-over-year. This compares to LTL peers who have driven year-over-year improvement in ORs (to record
levels), EBITDA and EPS in FY 2020.
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Ineffective Board which Lacks Material Share Ownership. There has not been a single insider
purchase of shares since 2009, a stark contrast to the more than $125 million worth of shares sold by Company insiders (current
and former insiders) over this period. We are concerned that the lack of vested financial interest in the Company by directors
coupled with Thomas Schmitt’s dual role as Chairman and CEO is hindering the Board’s ability to hold management accountable.
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Over the past several months, Ancora has attempted
to reach an amicable resolution with the Company regarding its concerns identified above; however, the incumbent Board and management
team have refused to enact the changes that we believe are necessary to drive shareholder value, leaving us little choice but to
nominate a competing slate of director candidates.
We are pleased to announce that our slate includes
Forward Air’s founder, Scott M. Niswonger, and former CFO, well-respected industry executive Andrew C. Clarke, along with
shareholder representative James Chadwick of Ancora and executive leadership specialist Dawn Garibaldi. If elected, our nominees
will work tirelessly to streamline the Company’s portfolio of services, drive significant margin improvement through cost
take-outs and productivity enhancements, improve efficiency from capital investments, and realign executive compensation and incentives.
We believe a better path forward for shareholders
is available at the Annual Meeting.
The full text of the letter is below.
***
February 10, 2021
Dear Fellow Shareholders,
Ancora Holdings, Inc. (together with its affiliates,
“Ancora” or “we”), a significant shareholder of Forward Air Corporation (“Forward Air” or the
“Company”), which together with the other participants in its solicitation beneficially owns approximately 6.3% of
the Company’s outstanding shares, believes that the Company’s Board of Directors (the “Board”) must be
significantly reconstituted to address the Company’s prolonged stock price and operating underperformance, which Ancora believes
has been largely driven by the Board’s poor operational oversight, ineffective capital allocation strategy and failure to
optimize the Company’s balance sheet. In response, Ancora has nominated four highly qualified candidates – James Chadwick,
Andrew C. Clarke, Dawn Garibaldi and Scott M. Niswonger – for election to the Board at the Company’s upcoming 2021
Annual Meeting of Shareholders.
Over the past decade or so, Forward Air has
embarked on a growth strategy focused on acquisitions of new service offerings which were both margin and return dilutive to the
core business. Potentially even more destructive than the growth strategy itself was that this focus also diverted management and
the Board’s attention from effectively operating the core Expedited LTL business, resulting in a significant erosion in profitability
(>1,000 bps deterioration in operating margins). During this time period, the Company spent ~$975 million on acquisitions and
capex combined, while cutting its return on invested capital (ROIC) in half from ~30% to ~15%. We believe these actions contributed
to Forward Air becoming a convoluted story for investors, resulting in minimal interest in the name as investors struggled to formulate
a thesis on the Company and/or identify potential catalysts. Taken together, these issues led to Forward Air significantly underperforming
its peers on a TSR basis over nearly every relevant time period.
Ancora believes further pursuit of the current
strategy by the current Board and management team will continue to generate scant improvements in profitability and ROIC as well
as underwhelming returns for shareholders. As such, Ancora believes a revamped strategy underpinned by a refreshed Board and strengthened
management team is paramount. With the right talent and oversight in place, Ancora believes the Company can execute on what we
believe to be a >1,000 bps margin improvement opportunity focused primarily on the core Expedited LTL business, which will be
accomplished through a cost rationalization plan and targeted organic growth initiatives.
We believe the core Expedited LTL business
can and should be operating around an 80% operating ratio (OR) and potentially sub-80% OR over time (profitability levels that
the business has operated at in the past). Additionally, we believe the Company should pursue a divestiture of the Intermodal (in
all reality a drayage business) business with estimated net proceeds approaching $300 million (if not more), which we would suggest
be immediately directed to share repurchases. The last tenet of Ancora’s plan is centered on optimizing the Company’s
balance sheet which is significantly under-levered, we believe, considering the Company’s free cash flow profile as well
as the targeted pro-forma optimization impact of our proposed actions. If elected, our candidates would propose to implement a
large front-loaded buyback program. In our view, there will be no higher return/accretive use of capital than repurchasing shares
of the Company as it executes the prescribed improvements.
Ultimately, Ancora believes that a refreshed
Board and strengthened management team executing on this revamped strategy will result in a streamlined portfolio, significant
margin improvement, substantial increases in free cash flow and free cash flow per share, and meaningful improvements in ROIC,
while also bringing renewed investor attention to the Forward Air story. We believe these actions will unlock tremendous value
and should drive the Company’s share price much higher than its current levels.
With this in mind, we would like to take the
opportunity to first expand upon the reasons why we believe change is needed at Forward Air before providing the key highlights
of our slate’s strategy for enhancing value for all shareholders.
WHY CHANGE IS NEEDED
Poor Capital Allocation and Declining
ROIC
Forward Air began its foray into acquisitions
outside of the core Expedited LTL business in 2007 with the acquisition of Pool Distribution (which has been moved to discontinued
operations and is currently awaiting a potential sale or to be shut down). Since then, the Company has completed 18 additional
acquisitions, all of which were outside of its core service offering except for the Towne Freight deal in 2015, with total capital
deployed of ~$575 million. When combined with the ~$400 million deployed on capital expenditures over this period, the Board has
overseen the deployment of ~$975 million in total capital in pursuit of its growth strategy. If the Board is serving in the shareholders’
best interests, then we ask what did Forward Air shareholders gain from this nearly $1 billion capital spend?
Over this time period, consolidated EBITDA,
net income and diluted EPS all increased at modest ~5-6% CAGRs (growth rates significantly below those of peers) and this encompasses
both organic and inorganic contribution compared to peers that completed minimal, if any, M&A.
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Consolidated EBITDA increased ~$77 million (5.5% CAGR)
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Net income increased ~$39 million (5% CAGR)
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Diluted EPS increased ~$1.45 (6% CAGR)
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That said, the most troubling metric of all,
we believe, is the complete evisceration of the Company’s ROIC. As shown in the chart below, Forward Air generated a ~30%
ROIC in 2007 compared to ~15% today. For further reference, during Mr. Clarke’s previous tenure at Forward Air as CFO
(2001-2006), ROIC averaged ~39%. It is also instructive to look at the timing of decline in ROIC as the Company did not
pursue any M&A in the 2010-2012 time frame during which ROIC rebounded nicely post the Great Recession. Then, beginning in
2013 and continuing to today, ROIC has declined nearly in lock-step with each additional acquisition. Further, as we will detail
next, this inverse relationship is also glaringly apparent between the timing of M&A and deterioration in the core Expedited
LTL OR. Ancora finds it incomprehensible as to why management and the Board would:
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Repeatedly pursue acquisitions in lower margin / lower ROIC businesses, or
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Remain committed to pursuing this M&A growth strategy when the most shareholder accretive action,
in our view, available was (and remains) returning the core Expedited LTL business to previous margin / ROIC levels.
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We believe the Board has failed shareholders
by focusing on growth at the expense of returns for the better part of the past decade.
Annual Capital Allocation Breakdown and ROIC
(2007-2019)
Source: Company Filings.
$ in millions.
Troublingly, current Chairman and CEO
Thomas Schmitt further accelerated the acquisition spree since his arrival in September 2018 – just as he indicated he would
on his first earnings call as CEO on October 25, 2018 – on which he described his vision for the Company:
“Our leadership team
will be focused on becoming an even larger, asset-light freight and logistics company. We have a terrific business
model and a very, very solid core strategy, and we will be somewhat aspirational in our thinking about ways we can accelerate
our growth. We will ask and answer the how high is up question and there's tons of untapped upside. We will review our
portfolio to ensure we have the right offerings for the future. We will consider organic and inorganic investments to
achieve our objectives with a careful focus on returns, results matter, and we will not confuse efforts with results.”
Forward Air has completed six acquisitions
in its pursuit of becoming a larger transportation company under Mr. Schmitt’s leadership. Unfortunately for shareholders,
this has failed to yield positive results as the Company’s ROIC has declined from ~16% in FY 2018 to <10% in FY 2020.
In our view, shareholders cannot afford for the Board to remain committed to a strategy that sacrifices ROIC for growth.
Significant Margin Deterioration in Core
Expedited LTL
The decline in the operating performance of
the core Expedited LTL business is just as alarming as the decline in ROIC. The last year the core Expedited LTL business generated
~80% OR (equivalent of a ~20% EBIT margin) was in 2011. Since then, top-line revenue has increased >80% (~7.7% CAGR) compared
to EBIT increasing ~18% (~2.1% CAGR), with EBIT margins declining ~675 bps from 19.6% to 12.8% during this period. From an OR perspective,
the OR deteriorated from 80.4% in 2011 to 87.2% in 2019. Ancora struggles to aptly characterize this declining operating performance
other than to say it is unacceptable.
Core Expedited LTL Revenue, EBIT, and EBIT
Margins (2011-2019, LTM)
Source: Company Filings
and Ancora Estimates. LTM as of 9/30/2020. $ in millions.
Core Expedited LTL Operating Ratio (2011-2019,
LTM)
Source: Company Filings
and Ancora Estimates. LTM as of 9/30/2020.
This continued degradation in the OR is confounding
particularly considering management has publicly stated that there is no reason why the core Expedited LTL business should not
be operating in the low to mid-80% OR range. For instance, at the Baird Investment Conference on November 8, 2018, CFO Michael
Morris provided his view on core Expedited LTL OR expectations as follows:
“There's no reason
that the LTL business at Forward Air can't operate at a low 80s OR in the right environment. If you look mid-cycle and if you
have the fleets and if you have pricing discipline, we certainly should be in the mid-80s range. And I think some of the
initiatives that Tom will bring around revenue management and other opportunities to grow our service reps will give us a greater
probability of being able to improve from there and look a bit more like we did in the early 2000s.”
For reference, we believe the Company’s
core Expedited LTL will do an annual OR >90% in FY 2020. We ask why is there such a glaring disconnect between the OR level
that management has indicated the core Expedited LTL business can operate at relative to the actual results achieved?
Looking more closely at the core Expedited
LTL business, it becomes apparent to us that a lack of operating discipline is the primary culprit behind the margin deterioration.
While total revenue and tonnage have increased materially, total cost per LTL ton has increased ~35% since 2011, which has resulted
in EBIT per ton declining ~15% over the time period. Ancora believes management and the Board’s pursuit of its M&A driven
growth strategy resulted in diverting their attention from the core value driver of the business and stock. As a result, there
was not a laser focus on containing operating costs, managing a balanced network, knowing exactly what it costs to move a piece
of freight so that it can be priced accordingly, driving productivity improvements among freight handlers, aligning salesforce
incentives based on EBIT per ton/shipment, etc. The hallmark of best-in-class transportation companies is the relentless, daily
focus on operating costs and pricing freight according to what it costs to move said piece of freight, and we believe management
and the Board have neglected that focus for years.
Core Expedited LTL Cost per LTL Ton (2011-2019)
Source: Company Filings
and Ancora Estimates.
Core Expedited LTL EBIT per LTL Ton (2011-2019)
Source: Company Filings
and Ancora Estimates.
Ancora believes there are a myriad of issues
behind the subpar operating performance of the core Expedited LTL business, but will highlight three of the key issues that stand
out from our viewpoint as an outsider:
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Negative mix shift in purchased transportation spend
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Deterioration in productivity metrics
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Failure to take price increases despite other LTLs successfully doing so
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Negative Mix Shift in Purchased Transportation
Spend
From 2009 to 2019, Forward Air’s purchased
transportation spend mix has shifted from a 70/30 split between owner-operators and third-party carriers to a nearly 50/50 split.
This dynamic is significant given third-party capacity is substantially more expensive than utilizing Forward Air’s owner-operator
pool and also leads to lower service levels given outside drivers (by no fault of their own) are likely not as cognizant of Forward
Air’s “precision execution” culture and may not be as familiar with certain freight lanes. At the November 13,
2019 Stephens Investment Conference, Mr. Schmitt detailed the purchased transportation issue well:
“In the toughest stretches
of time, we had 20%, 30% or so outside purchase transportation, which in essence means we are accessing drivers who are not in
our stable pool of people that we actually work with on a consistent basis. That typically is not good for anyone. It's
more expensive. The service expectation, execution may be a bit more inconsistent because they don't know us and we don't know
them that well. They don't know those lanes as well. So you have like a typical vicious cycle of higher purchase transportation
percentage, lower service levels, higher cost, and the whole thing just keeps going down. So, not a good picture.”
Core Expedited LTL Purchased Transportation
Spend Mix (2009-2019)
Source: Company Filings.
Further, given that Forward Air utilizes an
asset-light operating model, it largely does not employ truck drivers or own trucks, instead the Company utilizes owner-operators
to move the freight. As such, purchased transportation is the largest cost item on the income statement. Since Mr. Schmitt became
CEO in September 2018, he and the management team have reassured investors that leadership is taking proactive steps to better
manage purchased transportation spend issues and position the core Expedited LTL business to achieve greater incremental EBIT
flow-through; however, there is no evidence in the numbers that this is occurring as net revenue margins remain depressed relative
to historical levels even when factoring in the cyclical nature of freight cycles. For example, in 2019 core Expedited LTL net
revenue margins improved ~300 bps year-over-year but were still ~450-500 bps below historical trough net revenue margin levels
as detailed in the graph below. Given that management teams at other asset-light transportation companies have demonstrated strong
execution in navigating cyclical swings in freight cycles to preserve net revenue margins, Ancora believes this is a fixable problem
with the proper focus and oversight from an experienced and qualified Board.
Core Expedited LTL Net Revenue Margins (2011-2019)
Source: Company Filings
and Ancora Estimates.
Deterioration in Productivity Metrics
Over the past decade, Ancora believes there
has been a significant deterioration in the productivity of the employee base as well as unnecessary headcount additions at Forward
Air, and core Expedited LTL in particular. We refer to this productivity decline in two ways: 1) inside the terminal – meaning
the freight handlers and 2) outside the terminal – meaning the rest of the employee base (i.e. middle management, sales
force, back office, technology, etc.).
Freight handler productivity (calculated
as pounds per freight handler) has decreased >10% from 2010 to 2019.1
Further, just as concerning to Ancora is the significant decline in the ratio of freight handlers to other employees, which
is down ~32% from 1.59x to 1.09x over the past decade. We believe this metric directly implies that substantial additions to
headcount have materialized at Forward Air, resulting in a bloated cost structure both within core Expedited LTL as well as
throughout the rest of the organization. Ancora believes there is a significant opportunity to rationalize this cost
structure and drive meaningful increases in productivity.
Productivity Metric – Ratio Freight
Handler to Other Employee (2010-2019)
Source: Company Filings
and Ancora Estimates.
Failure to Take Price Increases Despite
Other LTLs Successfully Doing So
In 2014, management began consistently reporting
revenue per hundredweight, ex-fuel (rev/cwt, ex-fuel), which is a proxy for price, for the core Expedited LTL business. Since
then, rev/cwt, ex-fuel has increased ~11%, representing a ~2.1% CAGR. Further, core Expedited LTL’s percentage increase
in pricing did not even come close to covering the increase in costs the business experienced over this time period as total cost
per LTL ton was up ~23%, representing a ~4.2% CAGR. From 2014 to 2019, the delta between cost and pricing percent increase was
negative (12%). Ancora believes this is a function of both an inability to contain costs as well as a difficulty in passing along
price increases to customers.
1 Source: Forward Air filings and Ancora estimates.
Core Expedited LTL Revenue/cwt, ex-fuel (2014-2019)
Source: Company Filings.
It is also instructive to note that the underlying
pricing backdrop within the LTL industry during this time period was very rational and healthy as annual price increases were in
the 3.5-5% range on average, with some LTL peers realizing price increases substantially higher. The chart below illustrates that
the Company’s core Expedited LTL achieved the lowest percent increase in price among LTL peers as well as being the only
one to experience a negative delta between the percent increase in costs and pricing. Since 2014, the average delta between
cost and pricing percent increase is 12% for LTL peers compared to the Company’s core Expedited LTL’s delta of negative
(12%).
LTL Peer Comparison – Cost per LTL
Ton % Increase vs Pricing % Increase since 2014
Source: Company Filings.
XPO reflects only the LTL business within XPO.
Ultimately, given such drastic decline in profitability
over such a prolonged period, one would think shareholders, potential investors as well as the analyst community would be frequently
asking questions regarding margin deterioration and what the plan is to remedy the issue. While such parties are likely aware of
the issue to some extent, Ancora fears they may not be aware of the magnitude of the decline due to the following:
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Forward Air has re-segmented its business units/segment reporting three times since 2014, with
the most recent re-segmentation in February 2020 resulting in the creation of an Expedited Freight segment that includes core Expedited
LTL, Truckload Expedited and Final Mile. The most concerning aspect of this recent re-segmentation is that the Company provides
a revenue breakdown of each of these individual businesses but then only includes consolidated expense line items and segment EBIT.
Thus, investors are unable to appropriately gauge the underlying profitability of the respective businesses.
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Since the creation of the new Expedited Freight segment, management has steadfastly articulated
to investors that the reason the segment continues to experience declining profitability is because the higher growth, lower-margin
businesses (Truckload Expedited and Final Mile) are dragging consolidated segment margins lower. While this is without question
a true statement, it is misleading because those two businesses represent around ~15% of consolidated segment EBIT considering
they both operate at a high-90s% OR. For example, the table below provides a breakdown of the Expedited Freight segment based on
reported 3Q20 results showing the implied OR of the core Expedited LTL business assuming various OR levels for the Truckload Expedited
and Final Mile businesses.
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Breakdown of Expedited Freight Segment for
3Q20 Results.
Source: Company Filings
and Ancora Estimates.
Lackluster Relative Operating Performance
The 2014-2019 time period was a favorable fundamental
backdrop for the LTL industry and transportation companies in general. To further support our view that results at core Expedited
LTL are a function of a lack of operating discipline by management and ineffective oversight by the Board, Ancora notes the drastic
divergence in operating performance at the Company compared to LTL peers over the same time period. LTL peers have seen ORs improve
~600 bps on average since 2014 compared to a ~350 bps deterioration for core Expedited LTL, representing a ~950 bps delta in operating
performance over this five-year period.
LTL Peer Comparison – Operating Ratio
(2014-2019, LTM)
Source: Company Filings and Ancora Estimates.
XPO reflects only the LTL business within XPO. LTM as of 9/30/2020.
This stark contrast in operating performance
is best exemplified by looking at EBIT on a per ton and per shipment basis as shown in the tables below. On average, LTL peers
were able to nearly double EBIT on a per ton/shipment basis over the past five years given their ability to capitalize on a strong
fundamental backdrop. LTL peers executed well by containing costs, taking price above cost inflation, increasing density in their
networks and purging unprofitable freight that either was not operating at a sufficient OR level or did not appropriately fit into
their networks. On the other hand, Forward Air’s core Expedited LTL business saw EBIT per ton/shipment decline over
the past five years. EBIT per ton decreased ~9% and EBIT per shipment decreased ~13%.
LTL Peer Comparison – EBIT per Ton
(2014-2019)
Source: Company Filings
and Ancora Estimates. XPO reflects only the LTL business within XPO.
LTL Peer Comparison – EBIT per Shipment
(2014-2019)
Source: Company Filings
and Ancora Estimates. XPO reflects only the LTL business within XPO.
Peer Performance Demonstrates What Could
Have Been at Forward Air
Forward Air shareholders do not have to look
far to see what could have been if, in our view, the Board provided the requisite operational oversight and pursued an effective
capital allocation strategy focused on maximizing ROIC. LTL peers Old Dominion Freight Line, Inc. (“Old Dominion”)
(NASDAQ: ODFL) and Saia Inc. (“Saia”) (NASDAQ: SAIA) focused on organic growth and continuous OR improvement, which
drove substantial improvement in ROIC and valuation multiples, and ultimately their stock price.
Since 2007, Old Dominion has seen its EBITDA
increase at ~15% CAGR with ROIC more than doubling (11.2% to 23.3%) and the stock is up ~30x. From the same starting point, Saia’s
EBITDA has increased at ~11% CAGR with ROIC nearly doubling (7.3% to 13.4%) and the stock is up ~22x. By comparison, Forward Air’s
EBITDA has increased at a ~3% CAGR with ROIC getting cut in half (~30% to ~15%) and the stock is up only ~1.5x.2
To make the picture even clearer, we present
the historical indexed stock price performance of Forward Air compared to its LTL peers (Old Dominion, Saia and XPO Logistics,
Inc. (NYSE: XPO)) and J.B. Hunt Transport Services, Inc. (NASDAQ: JBHT), which serves as a representative for the average transportation
company. From 2008 through 2020, the stock price increase achieved by peers relative to Forward Air is staggering. In our view,
the graph below crystalizes the need for leadership change at the Company, and we trust our fellow shareholders will agree.
2
Source: Forward Air, Old Dominion and Saia filings. FactSet. Calculated as of 12/31/2020.
Historical Indexed Stock Price Comparison
– Forward Air vs Peers (2008-2020)
Source: FactSet, XPO Return
Since Brad Jacobs Took Ownership in September 2011 is ~9x.
Subpar Recent Results Suggest Management
Execution Remains Inadequate
Forward Air’s FY 2020 results have substantially
underperformed LTL peers as the core Expedited LTL OR has deteriorated ~400 bps year-over-year with EBITDA down ~35% year-over-year
and diluted EPS (ex-Pool Distribution) down ~25% year-over-year. Meanwhile, LTL peers Old Dominion and Saia have experienced year-over-year
improvement in ORs (to record levels), EBITDA and EPS in FY 2020.
The COVID-related dislocation in the freight
markets created tremendous challenges; yet, just as many, if not more, opportunities for profitable growth in 2020. The financial
metrics highlighted below speak for themselves and suggest, we believe, that Forward Air’s current management is not getting
the job done from an execution perspective. Ancora believes shareholders deserve upgraded leadership capable of driving improved
operating results regardless of the fundamental operating environment.
LTL Peer Comparison – 2020 Operating
Performance
Source: Company Filings,
Ancora Estimates. FWRD’s diluted EPS is ex-Pool Distribution.
Ineffective Board which Lacks Material
Share Ownership
Despite presiding over a company that has consistently
underperformed its peers and experienced deteriorating operational metrics, it seems to be business as usual on the Board. We question
whether the lack of urgency could be attributed to the fact that the incumbent directors have a lack of vested financial interest
in the Company. Notably, there has not been a single insider purchase of shares since 2009, a stark contrast to the
regular insider selling over this time period. Over the past ten years, Company insiders (current and former insiders) have
purchased $0 of Forward Air shares and sold over $125 million.
We are concerned that the Board’s seeming
unwillingness to hold management accountable could be due to the fact that Mr. Schmitt occupies both the Chairman and CEO roles.
In our view, Mr. Schmitt’s influence over the Board could help explain the unambitious short-term incentive (STI) targets
the Board has set for management that seemingly rewards subpar operating performance. More specifically, management STI targets
are primarily based on EBIT, and the Board has set thresholds that allow annual cash bonuses for annual declines in EBIT. For example,
in 2019, annual EBIT could have declined nearly 10% year-over-year and management could still have received 25% of their annual
cash bonus.
Although Mr. Schmitt first became CEO in September
2018, he did not become Chairman until May 2019. This is notable to us because it was not until 2019 that the Board added a new
“downside” threshold level that allows STI pay-outs at 25% of target. While the “downside” threshold level
did not materialize until Mr. Schmitt became Chairman, the troubling pattern of the Board rewarding management for missing targets
unfortunately predates his arrival and has been going on for years.
The table below shows the Company’s STI
targets, actual results and the percentage pay-out management received over the past five years. Three out of the past five years
(2015, 2016, 2019), management missed the target annual EBIT goal by >10% but still got paid a substantial portion of their
annual cash bonus. Ancora believes this type of goal setting is unacceptable and appears to align more with the interests of management
than those of shareholders.
NEO Short-term Incentive Thresholds (2015-2019)
Source: Company Filings.
ANCORA’S SOLUTION
We have recruited a highly qualified slate
of director candidates that includes industry experts with business acumen and successful track records, who we believe will be
able to help restore Forward Air to producing best-in-class results from a margin and return perspective. If elected, our slate
will work tirelessly to streamline the Company’s portfolio of services, drive significant margin improvement through cost
take-outs and productivity enhancements, improve efficiency from capital investments, and realign executive compensation and incentives.
In our view, these actions, coupled with a large front-loaded share buyback, present an opportunity to dramatically improve profitability,
strengthen cash flow, increase ROIC and generate significant shareholder value.
While Ancora intends to share its full detailed
plan for creating shareholder value in the coming weeks, the following provides an overview of the plan’s key pillars:
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Strengthen senior management team – Name Mr. Clarke as Chairman (initially as Executive
Chairman to oversee value transition). Mr. Clarke is a highly-respected industry veteran and proven operator (CFO at CH Robinson
and CEO at Panther Expedited) with intimate knowledge of Forward Air’s business given his previous role as CFO from 2001-2006.
Mr. Clarke will bring a real operating focus and the boots on the ground discipline we believe is currently lacking at Forward
Air.
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·
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Rationalize core Expedited LTL business – We have identified a >1,000 bps improvement
opportunity in core Expedited LTL margins. We strongly believe this business can and should be operating at ~80% OR. The cost rationalization
plan will be a combination of cost take-outs and productivity improvements focused on reduced reliance on third-party capacity,
headcount reductions, labor productivity and more efficient technology spend. We will also pursue strategic growth initiatives
focused on a premium pricing strategy.
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·
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Optimize capital allocation strategy – Focus capital allocation initiatives solely
on the core Expedited LTL business until the business is operating at what we would deem sufficient margin levels. Additionally,
we believe Forward Air maintains a significantly under-levered balance sheet (~0.5x net leverage currently), particularly given
the Company’s free cash flow characteristics and the targeted pro-forma optimization impact of our proposed operating actions.
We would seek to implement a large front-loaded buyback and believe the business can reasonably support 2x leverage.
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Pursue non-core business divestitures – We believe the Intermodal and Pool Distribution
businesses are not critical to Forward Air and actually detract from its valuation multiple given their significantly lower margins
/ ROIC. We estimate the combined net proceeds from the sale of Intermodal and Pool Distribution would conservatively be at least
$300 million, with proceeds that could be directed to share repurchases.
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·
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Elect new representatives and enhance corporate governance – We are seeking to add
four highly qualified candidates to the Board who collectively bring industry and turnaround experience, diversity and a shareholder’s
perspective to the boardroom, which we believe will help drive results. Our candidates would also seek to separate the Chairman
and CEO roles and make proposals to align management incentives with improvements to ROIC and TSR metrics.
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Ultimately, Ancora believes that a refreshed
Board and strengthened management team executing on this revamped strategy will result in a streamlined portfolio, significant
margin improvement, substantial increases in free cash flow and free cash flow per share, and meaningful improvements in ROIC,
while also bringing renewed investor attention to the Forward Air story. We believe these actions will unlock tremendous value
and should drive the Company’s share price much higher than its current levels.
Our nominees are:
Scott M. Niswonger
has a storied career in supply chain management and logistics, which includes his role as the Founder of Forward Air (NASDAQ: FWRD)
in 1990, which operated as the sister company of Landair Transport, Inc. (formerly NASDAQ: LAND), a trucking, warehousing, and
supply-chain management company, he also founded in 1981 (“Landair”). The companies were separated into two public
entities in 1998. Mr. Niswonger retired as Chairman of Landair when it was acquired by Covenant Transportation Group, Inc. in July
2018, a role he held since 1981. Mr. Niswonger previously served as Chief Executive Officer of Landair, from 1981 to 2003. He also
served as Chief Executive Officer and Chairman of Forward Air, from its founding in 1990 until 2003 and 2005, respectively. Previously,
Mr. Niswonger served as Vice President of Flying Tiger Lines Inc., a global cargo airline, from 1984-1986. Mr. Niswonger began
his career as the corporate pilot for President of The Magnavox Company. He recently served as an independent director and member
of the Nominating & Corporate Governance and Executive & Risk Committees of First Horizon National Corp. (NYSE: FHN), a
bank holding company, from October 2011 to April 2020. Mr. Niswonger has also served on the Board of Directors of People’s
Community Bank (n/k/a PCB Bancorp (NYSE: PCB)), a bank holding company, from 2003 to 2005. Mr. Niswonger currently serves as President
and Founder of the Niswonger Foundation, a non-profit organization providing educational programs, scholarships and other charitable
activities, and is the lead benefactor for the Niswonger Children’s Hospital. Mr. Niswonger holds a B.S.B.A. from Tusculum
University, and an A.D. in Aviation Technology and Doctorate in Technology from Purdue University. He is a certified airline transport
pilot.
Andrew C. Clarke
has served on the boards of directors of Big Lots, Inc. (NYSE: BIG), a national discount retailer, since April 2020, and Element
Fleet Management Corp. (TSX: EFN), a fleet management services company, since June 2018. Mr. Clarke served as Chief Financial
Officer of C.H. Robinson, Inc. (NASDAQ: CHRW), one of the world’s largest third-party logistics and supply chain management
providers, from June 2015 to March 2019. Previously, Mr. Clarke served as Chief Executive Officer and President at Panther Expedited
Services, Inc. (“Panther Expedited”) (n/k/a Panther Premium Logistics), a wholly owned subsidiary of ArcBest Corporation
(NASDAQ: ARCB), a logistics provider with expertise in ground expedite, air freight, international air and ocean freight and air
charter, from July 2006 to February 2013. Prior to that, Mr. Clarke served as Chief Financial Officer, Senior Vice President and
Treasurer at Forward Air Corporation (“Forward Air”) (NASDAQ: FWRD), a leading provider of ground transportation and
related logistics services to the North American air freight and expedited LTL market, from 2001 to 2006. From 2000 to 2001, Mr.
Clarke served as Senior Vice President, Chief Financial Officer and Treasurer at Logtech Corporation, a subsidiary of Forward
Air and a transportation technology company that specialized in the delivery of real-time shipment information to shippers and
transportation providers. Before that, Mr. Clarke worked in corporate finance analyst roles at financial services companies Deutsche
Bank AG (NYSE: DB), Alex. Brown & Sons, Inc., and A.G. Edwards & Sons, Inc. Mr. Clarke has served on the board of directors
of Direct ChassisLink Inc., a private company providing marine and domestic chassis and asset management services to the North
American intermodal industry, since June 2019, and Rock-it Cargo USA LLC, a private company providing specialty freight forwarding
and logistics services for clients in various entertainment industries, since November 2019. Previously, Mr. Clarke served on
the boards of directors of Blount International, Inc. (formerly NYSE:BLT), a manufacturer of equipment, accessories and replacement
parts for the global forestry, garden and construction industries, from April 2010 until it was acquired in April 2016, Pacer
International, Inc. (formerly NASDAQ: PACR), one of the largest truck brokerage and intermodal marketing companies, from 2005
to 2009, Forward Air, from 2001 to 2006 and Panther Expedited, from 2006 to 2012. Mr. Clarke holds a B.S. from Washington University
in St. Louis and an M.B.A. from the University of Chicago Booth School of Business.
James Chadwick
has served as Managing Director, Head of Alternative Investments and Portfolio Manager with Ancora Holdings Inc., since April 2014.
His professional experience in activist intervention includes service on the board of directors of many public companies including
Hill International, Inc. (NYSE: HIL), a construction consulting firm, from October 2018 to June 2020; Stewart Information Services
Corporation (NYSE: STC), a real estate services provider, from May 2015 to December 2019; Riverview Bancorp, Inc. (NASDAQ: RVSB),
a savings and loan holding company, from August 2015 to May 2017; Emergent Capital, Inc. (OTCMKTS: EMGCQ), a specialty finance
company, from June 2013 to May 2018; Insured Municipal Income Fund Inc. (formerly NYSE: PIF), a closed end fund, from September
2009 to December 2014; Meade Instruments Corporation (NASDAQ: MEAD), an optical instruments manufacturer, from June 2006 to December
2008; AirNet Systems Inc. (formerly NASDAQ: ANTE), an express air cargo airline for time-sensitive deliveries, from July 2005 to
June 2008; and ImageWare Systems Inc. (OCTMKTS: IWSY), an identity management software company, from July 2003 to March 2004. He
has served as Managing Director at several private equity firms including Harlingwood Equity Partners, LLC, from March 2009 to
March 2014; and Opus Equity Partners, LLC, from June 2010 to April 2011. Mr. Chadwick founded and managed two hedge funds, Monarch
Activist Partners LP, from January 2006 to December 2008, and PCI Partners LLC, from January 2003 to June 2005. He began his activist
career in 1999 working for the pioneering activist fund Relational Investors LLC. Mr. Chadwick earned his B.A. in History from
the University of California Los Angeles.
Dawn Garibaldi
has served as President of Amplify Strategy Group, LLC (“Amplify”), an independent consulting firm providing management
consulting and executive coaching services, since January 2017. Prior to founding Amplify, Ms. Garibaldi built a successful thirty
year career serving as an international business executive at The Procter & Gamble Company (“Procter & Gamble”)
(NYSE: PG) in leadership positions of increasing responsibility in strategic supply chain design and operations, logistics, manufacturing
and innovation. From July 2014 to August 2016, Ms. Garibaldi served as the Vice President of Procter & Gamble Asia, Fabric
and Home Care Supply Chain. She served as Vice President of Procter & Gamble Pampers Global Innovation, located in Singapore,
from July 2012 to June 2014. From June 2007 to June 2012, Ms. Garibaldi served as Vice President of Procter & Gamble, North
America, Baby Care Supply Chain. From January 2003 to May 2007, Ms. Garibaldi served as Senior Director of Manufacturing of Procter
& Gamble Pampers in Euskirchen, Germany. From March 2000 to December 2003, she served as Director of Manufacturing of Procter
& Gamble Baby and Feminine Care in Istanbul, Turkey. Ms. Garibaldi began her career at Procter & Gamble in 1986 as a Sales
Manager for the Northeast District. Ms. Garibaldi holds a B.S. in Microbiology from the University of Rochester. In addition to
leading Amplify, she is a member of the Executive Faculty at the Rady School of Management at University of California San Diego
and serves on the Board of Directors of the Aurora Fox Arts Center.
While Ancora remains open to reaching an amicable
resolution with the Company, we firmly believe that significant changes are necessary to transform the Company into an industry
leader. We are very excited about the prospects for value creation upon the execution of our plan and look forward to sharing more
specifics with shareholders as we approach the 2021 Annual Meeting.
Sincerely,
Frederick DiSanto
Chairman and Chief Executive Officer
Ancora Holdings Inc.
About Ancora
Ancora Holdings, Inc. is an employee owned, Cleveland, Ohio based
holding company which wholly owns four separate and distinct SEC Registered Investment Advisers and a broker dealer. Ancora Advisors
LLC specializes in customized portfolio management for individual investors, high net worth investors, investment companies (mutual
funds), and institutions such as pension/profit sharing plans, corporations, charitable & “Not-for Profit” organizations,
and unions. Ancora Family Wealth Advisors, LLC is a leading, regional investment and wealth advisor managing assets on behalf families
and high net-worth individuals. Ancora Alternatives LLC specializes in pooled investments (hedge funds/investment limited partnerships).
Ancora Retirement Plan Advisors, Inc. specializes in providing non-discretionary investment guidance for small and midsize employer
sponsored retirement plans. Inverness Securities, LLC is a FINRA registered Broker Dealer.
Investors:
James Chadwick
Ancora Alternatives LLC
(216) 593-5048
jchadwick@ancora.net
John Ferguson
Saratoga Proxy Consulting LLC
(212) 257-1311
Info@saratogaproxy.com
Media Contact:
Amy McGahan
Dix & Eaton
216-346-7716
amcgahan@dix-eaton.com
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
Ancora Catalyst Institutional, LP, together
with the other participants named herein (collectively, "Ancora"), intends to file a preliminary proxy statement and
accompanying WHITE proxy card with the Securities and Exchange Commission ("SEC") to be used to solicit votes for the
election of its slate of highly-qualified director nominees at the 2021 annual meeting of shareholders of Forward Air Corporation,
a Tennessee corporation (the “Company”).
ANCORA STRONGLY ADVISES ALL SHAREHOLDERS OF
THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE
PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST.
REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR.
The participants in the proxy solicitation
are anticipated to be Ancora Catalyst Institutional, LP (“Ancora Catalyst Institutional”), Ancora Catalyst, LP (“Ancora
Catalyst”), Ancora Merlin Institutional, LP (“Ancora Merlin Institutional”), Ancora Merlin, LP (“Ancora
Merlin”), Ancora Catalyst SPV I LP – Series I (“Ancora SPV I”), Ancora Catalyst SPV I LP – Series
J (“Ancora SPV J”), Ancora Catalyst SPV I LP – Series K (“Ancora SPV K”), Ancora Catalyst SPV I LP
– Series L (“Ancora SPV L”), Ancora Catalyst SPV I SPC Ltd. – Segregated Portfolio E (“Ancora SPC
E” and together with Ancora Catalyst Institutional, Ancora Catalyst, Ancora Merlin Institutional, Ancora Merlin, Ancora SPV
I, Ancora SPV J, Ancora SPV K and Ancora SPV L, the “Ancora Funds”), Ancora Advisors, LLC (“Ancora Advisors”),
Ancora Alternatives LLC (“Ancora Alternatives”), Ancora Family Wealth Advisors, LLC (“Ancora Family Wealth”),
The Ancora Group Inc. (“Ancora Inc.”), Inverness Holdings LLC (“Inverness Holdings”), Ancora Holdings Inc.
(“Ancora Holdings”), Frederick DiSanto, James M. Chadwick, Andrew C. Clarke, Dawn Garibaldi and Scott M. Niswonger.
As of the date hereof, Ancora Catalyst Institutional
directly owns 234,417 shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”). As of
the date hereof, Ancora Catalyst directly owns 18,004 shares of Common Stock. As of the date hereof, Ancora Merlin Institutional
directly owns 230,999 shares of Common Stock. As of the date hereof, Ancora Merlin directly owns 21,450 shares of Common Stock.
As of the date hereof, Ancora SPV I directly owns 165,004 shares of Common Stock. As of the date hereof, Ancora SPV J directly
owns 188,345 shares of Common Stock. As of the date hereof, Ancora SPV K directly owns 190,725 shares of Common Stock. As of the
date hereof, Ancora SPV L directly owns 84,541 shares of Common Stock. As of the date hereof, Ancora PCE E directly owns 483,130
shares of Common Stock. As of the date hereof, 115,884 shares of Common Stock were held in a certain managed account for which
Ancora Advisors serves as the investment adviser to (the “Ancora Advisors SMA”). As of the date hereof, 1,300 shares
of Common Stock were held in a certain managed account for which Ancora Family Wealth serves as the investment adviser to (the
“Ancora Family Wealth SMA”). As of the date hereof, Mr. Clarke beneficially owns 2,500 shares of Common Stock held
in the Andrew C. Clark revocable trust, of which Mr. Clarke is the sole settlor, beneficiary and trustee. As of the date hereof,
Mr. Niswonger directly owns 10,000 shares of Common Stock. Ancora Advisors, as the investment adviser to the Ancora Advisors SMA,
may be deemed the beneficial owner of the 115,884 shares of Common Stock held in the Ancora Advisors SMA. Ancora Alternatives,
as the investment adviser to each of the Ancora Funds and the general partner of each of the Ancora Funds other than Ancora SPC
E, may be deemed the beneficial owner of an aggregate of 1,616,615 shares of Common Stock owned by the Ancora Funds. Ancora Family
Wealth, as the investment adviser to the Ancora Family Wealth SMA, may be deemed the beneficial owner of the 1,300 shares of Common
Stock held in the Ancora Family Wealth SMA. Ancora Inc., as the sole member of Ancora Advisors, may be deemed the beneficial owner
of the 115,884 shares of Common Stock held in the Ancora Advisors SMA. Inverness Holdings, as the sole member of Ancora Family
Wealth, may be deemed the beneficial owner of the 1,300 shares of Common Stock held in the Ancora Family Wealth SMA. Ancora Holdings,
as the sole member of each of Ancora Alternatives and Inverness Holdings and the sole shareholder of Ancora Inc., may be deemed
the beneficial owner of an aggregate of 1,733,799 shares of Common Stock owned by the Ancora Funds and held in the Ancora Advisors
SMA and Ancora Family Wealth SMA. Mr. DiSanto, as the Chairman and Chief Executive Officer of Ancora Holdings, may be deemed the
beneficial owner of 1,733,799 shares of Common Stock owned by the Ancora Funds and held in the Ancora Advisors SMA and Ancora
Family Wealth SMA. As of the date hereof, neither Mr. Chadwick nor Ms. Garibaldi owns any shares of Common Stock.
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