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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 7/18/23 Amcon Distributing Co. 10-Q 6/30/23 60:7.3M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.55M
2: EX-10.1 Material Contract HTML 942K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 20K
12: R1 Document and Entity Information HTML 70K
13: R2 Condensed Consolidated Balance Sheets HTML 123K
14: R3 Condensed Consolidated Balance Sheets HTML 31K
(Parenthetical)
15: R4 Condensed Consolidated Unaudited Statements of HTML 97K
Operations
16: R5 Condensed Consolidated Unaudited Statements of HTML 20K
Operations (Parenthetical)
17: R6 Condensed Consolidated Unaudited Statements of HTML 76K
Shareholders' Equity
18: R7 Condensed Consolidated Unaudited Statements of HTML 20K
Shareholders' Equity (Parenthetical)
19: R8 Condensed Consolidated Unaudited Statements of HTML 142K
Cash Flows
20: R9 Summary of Significant Accounting Policies and HTML 35K
Basis of Presentation
21: R10 Acquisition HTML 67K
22: R11 Inventories HTML 21K
23: R12 Goodwill and Other Intangible Assets HTML 54K
24: R13 Dividends HTML 20K
25: R14 Earnings Per Share HTML 76K
26: R15 Debt HTML 58K
27: R16 Income Taxes HTML 23K
28: R17 Mandatorily Redeemable Non-Controlling Interest HTML 31K
29: R18 Business Segments HTML 253K
30: R19 Summary of Significant Accounting Policies and HTML 39K
Basis of Presentation (Policies)
31: R20 Acquisition (Tables) HTML 68K
32: R21 Goodwill and Other Intangible Assets (Tables) HTML 58K
33: R22 Earnings Per Share (Tables) HTML 75K
34: R23 Debt (Tables) HTML 53K
35: R24 Mandatorily Redeemable Non-Controlling Interest HTML 28K
(Tables)
36: R25 Business Segments (Tables) HTML 248K
37: R26 Summary of Significant Accounting Policies and HTML 38K
Basis of Presentation (Details)
38: R27 ACQUISITION - Additional Information (Details) HTML 41K
39: R28 ACQUISITION - Identifiable Assets and Liabilities HTML 44K
and Goodwill (Details)
40: R29 ACQUISITION - Other Intangible Asset Acquired HTML 31K
(Details)
41: R30 ACQUISITION - Unaudited Supplemental Financial HTML 24K
Data (Details)
42: R31 ACQUISITION - Unaudited Supplemental Pro Forma HTML 24K
Information (Details)
43: R32 Inventories (Details) HTML 20K
44: R33 GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill HTML 24K
(Details)
45: R34 GOODWILL AND OTHER INTANGIBLE ASSETS - Other HTML 34K
Intangible Assets (Details)
46: R35 GOODWILL AND OTHER INTANGIBLE ASSETS - Additional HTML 35K
Information (Details)
47: R36 GOODWILL AND OTHER INTANGIBLE ASSETS - HTML 34K
Amortization Expense (Details)
48: R37 Dividends (Details) HTML 20K
49: R38 Earnings Per Share (Details) HTML 49K
50: R39 DEBT - Credit Facilities (Details) HTML 43K
51: R40 DEBT - Long-Term Debt (Details) HTML 46K
52: R41 DEBT - Aggregate Minimum Principal Maturities HTML 38K
(Details)
53: R42 DEBT - Cross Default and Co-Terminus Provisions HTML 24K
and Other (Details)
54: R43 Mandatorily Redeemable Non-Controlling Interest HTML 38K
(Details)
55: R44 Business Segments (Details) HTML 91K
58: XML IDEA XML File -- Filing Summary XML 103K
56: XML XBRL Instance -- dit-20230630x10q_htm XML 1.67M
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| UNITED STATES |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i 10-Q
| |
i ⌧ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the quarterly period ended i June 30, 2023 |
OR
| |
i ◻ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the transition period from ___________to _________ |
Commission File Number i 1-15589
(Exact name of registrant as specified in its charter)
| | |
i Delaware |
| i 47-0702918 |
(State or other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification No.) |
| | |
| i 68122 | |
(Address of principal executive offices) | | (Zip code) |
Registrant’s telephone number, including area code: ( i 402) i 331-3727
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
i Common Stock, $0.01 Par Value | i DIT | i NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) i Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ | Accelerated filer ◻ | i Non-accelerated filer ⌧ | |
| | | |
Smaller reporting company i ⌧ | Emerging growth company i ◻ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ◻ No i ⌧
The Registrant had i 608,689 shares of its $.01 par value common stock outstanding as of July 17, 2023.
Form 10-Q
3rd Quarter
INDEX
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2023 and September 30, 2022
| | | | | | |
| | June | | September | ||
|
| 2023 |
| 2022 | ||
| | (Unaudited) | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash | | $ | i 739,013 | | $ | i 431,576 |
Accounts receivable, less allowance for doubtful accounts of $ i i 2.5 / million at both June 2023 and September 2022 | |
| i 78,640,187 | |
| i 62,367,888 |
Inventories, net | |
| i 162,567,117 | |
| i 134,654,637 |
Income taxes receivable | | | — | | | i 819,595 |
Prepaid expenses and other current assets | |
| i 13,630,317 | |
| i 12,702,084 |
Total current assets | |
| i 255,576,634 | |
| i 210,975,780 |
| | | | | | |
Property and equipment, net | |
| i 78,872,876 | |
| i 48,085,520 |
Operating lease right-of-use assets, net | | | i 19,739,321 | | | i 19,941,009 |
Goodwill | |
| i 5,778,325 | |
| i 5,277,950 |
Other intangible assets, net | |
| i 5,419,361 | |
| i 2,093,113 |
Other assets | |
| i 3,320,838 | |
| i 2,751,155 |
Total assets | | $ | i 368,707,355 | | $ | i 289,124,527 |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | i 51,853,159 | | $ | i 39,962,363 |
Accrued expenses | |
| i 15,960,945 | |
| i 14,446,210 |
Accrued wages, salaries and bonuses | |
| i 7,799,903 | |
| i 7,811,207 |
Income taxes payable | |
| i 752,658 | |
| — |
Current operating lease liabilities | | | i 6,300,102 | | | i 6,454,473 |
Current maturities of long-term debt | |
| i 2,738,524 | |
| i 1,595,309 |
Current mandatorily redeemable non-controlling interest | | | i 1,641,612 | | | i 1,712,095 |
Total current liabilities | |
| i 87,046,903 | |
| i 71,981,657 |
| | | | | | |
Credit facilities | |
| i 143,375,961 | |
| i 91,262,438 |
Deferred income tax liability, net | |
| i 3,138,204 | |
| i 2,328,588 |
Long-term operating lease liabilities | | | i 13,737,167 | | | i 13,787,721 |
Long-term debt, less current maturities | |
| i 12,229,486 | |
| i 7,384,260 |
Mandatorily redeemable non-controlling interest, less current portion | | | i 7,976,499 | | | i 9,446,460 |
Other long-term liabilities | |
| i 289,672 | |
| i 103,968 |
| | | | | | |
Shareholders’ equity: | | | | | | |
Preferred stock, $ i i .01 / par value, i i 1,000,000 / shares authorized | |
| — | |
| — |
Common stock, $ i i .01 / par value, i i 3,000,000 / shares authorized, i 608,689 shares outstanding at June 2023 and i 584,789 shares outstanding at September 2022 | |
| i 9,431 | |
| i 9,168 |
Additional paid-in capital | |
| i 30,175,977 | |
| i 26,903,201 |
Retained earnings | |
| i 102,000,218 | |
| i 96,784,353 |
Treasury stock at cost | |
| ( i 31,272,163) | |
| ( i 30,867,287) |
Total shareholders’ equity | | | i 100,913,463 | | | i 92,829,435 |
Total liabilities and shareholders’ equity | | $ | i 368,707,355 | | $ | i 289,124,527 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
3
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Operations
for the three and nine months ended June 30, 2023 and 2022
| | | | | | | | | | | | |
| | For the three months ended June | | For the nine months ended June | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Sales (including excise taxes of $ i 153.7 million and $ i 129.2 million, and $ i 414.9 million and $ i 315.5 million, respectively) | | $ | i 696,489,427 | | $ | i 550,584,152 | | $ | i 1,847,472,782 | | $ | i 1,365,043,621 |
Cost of sales | |
| i 649,623,651 | |
| i 516,907,540 | |
| i 1,724,504,862 | |
| i 1,277,757,425 |
Gross profit | |
| i 46,865,776 | |
| i 33,676,612 | |
| i 122,967,920 | |
| i 87,286,196 |
Selling, general and administrative expenses | |
| i 36,851,520 | |
| i 25,862,325 | |
| i 99,227,695 | |
| i 70,168,415 |
Depreciation and amortization | |
| i 2,103,429 | |
| i 912,501 | |
| i 4,982,068 | |
| i 2,514,968 |
| |
| i 38,954,949 | |
| i 26,774,826 | |
| i 104,209,763 | |
| i 72,683,383 |
Operating income | |
| i 7,910,827 | |
| i 6,901,786 | |
| i 18,758,157 | |
| i 14,602,813 |
| | | | | | | | | | | | |
Other expense (income): | | | | | | | | | | | | |
Interest expense | |
| i 2,385,842 | |
| i 655,811 | |
| i 6,249,540 | |
| i 1,222,829 |
Change in fair value of mandatorily redeemable non-controlling interest | | | i 698,571 | | | i 705,392 | | | i 864,684 | | | i 705,392 |
Other (income), net | |
| ( i 931,765) | |
| ( i 2,417,252) | |
| ( i 1,159,021) | |
| ( i 2,518,320) |
| |
| i 2,152,648 | |
| ( i 1,056,049) | |
| i 5,955,203 | |
| ( i 590,099) |
Income from operations before income taxes | |
| i 5,758,179 | |
| i 7,957,835 | |
| i 12,802,954 | |
| i 15,192,912 |
Income tax expense | |
| i 1,813,800 | |
| i 2,221,000 | |
| i 4,164,000 | |
| i 4,811,000 |
Equity method investment earnings, net of tax | |
| — | |
| i 307,973 | |
| — | |
| i 1,670,133 |
Net income available to common shareholders | | $ | i 3,944,379 | | $ | i 6,044,808 | | $ | i 8,638,954 | | $ | i 12,052,045 |
| | | | | | | | | | | | |
Basic earnings per share available to common shareholders | | $ | i 6.74 | | $ | i 10.61 | | $ | i 14.78 | | $ | i 21.25 |
Diluted earnings per share available to common shareholders | | $ | i 6.59 | | $ | i 10.38 | | $ | i 14.56 | | $ | i 20.72 |
| | | | | | | | | | | | |
Basic weighted average shares outstanding | |
| i 585,625 | |
| i 569,689 | |
| i 584,359 | |
| i 567,026 |
Diluted weighted average shares outstanding | |
| i 598,590 | |
| i 582,370 | |
| i 593,480 | |
| i 581,578 |
| |
| | | | | | | | | | |
Dividends paid per common share | | $ | i 0.18 | | $ | i 0.18 | | $ | i 5.54 | | $ | i 5.54 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Shareholders’ Equity
for the three and nine months ended June 30, 2023 and 2022
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | | | ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total | |||||
THREE MONTHS ENDED JUNE 2022 | | | | | | | | | | | | | | | | | | | |
Balance, April 1, 2022 | | i 917,009 | | $ | i 9,168 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 26,555,046 | | $ | i 86,336,525 | | $ | i 82,033,452 |
Dividends on common stock, $ i 0.18 per share | | — | | | — | | — | | | — | | | — | | | ( i 108,596) | | | ( i 108,596) |
Compensation expense related to equity-based awards | | — | | | — | | — | | | — | | | i 174,078 | | | — | | | i 174,078 |
Net income available to common shareholders | | — | |
| — | | — | | | — | | | — | | | i 6,044,808 | | | i 6,044,808 |
Balance, June 30, 2022 | | i 917,009 | | $ | i 9,168 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 26,729,124 | | $ | i 92,272,737 | | $ | i 88,143,742 |
| | | | | | | | | | | | | | | | | | | |
THREE MONTHS ENDED JUNE 2023 | | | | | | | | | | | | | | | | | | | |
Balance, April 1, 2023 | | i 943,272 | | $ | i 9,431 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 29,766,566 | | $ | i 98,167,058 | | $ | i 97,075,768 |
Dividends on common stock, $ i 0.18 per share | | — | | | — | | — | | | — | | | — | | | ( i 111,219) | | | ( i 111,219) |
Compensation expense related to equity-based awards | | — | | | — | | — | | | — | | | i 409,411 | | | — | | | i 409,411 |
Committed repurchase of treasury stock | | — | | | — | | ( i 2,363) | | | ( i 404,876) | | | — | | | — | | | ( i 404,876) |
Net income available to common shareholders | | — | |
| — | | — | | | — | | | — | | | i 3,944,379 | | | i 3,944,379 |
Balance, June 30, 2023 | | i 943,272 | | $ | i 9,431 | | ( i 334,583) | | $ | ( i 31,272,163) | | $ | i 30,175,977 | | $ | i 102,000,218 | | $ | i 100,913,463 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | | | ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total | |||||
NINE MONTHS ENDED JUNE 2022 | | | | | | | | | | | | | | | | | | | |
Balance, October 1, 2021 | | i 883,589 | | $ | i 8,834 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 24,918,781 | | $ | i 83,552,298 | | $ | i 77,612,626 |
Dividends on common stock, $ i 5.54 per share | | — | | | — | | — | | | — | | | — | | | ( i 3,331,606) | | | ( i 3,331,606) |
Compensation expense and settlement of equity-based awards | | i 33,420 | | | i 334 | | — | | | — | | | i 1,810,343 | | | — | | | i 1,810,677 |
Net income available to common shareholders | | — | |
| — | | — | | | — | | | — | | | i 12,052,045 | | | i 12,052,045 |
Balance, June 30, 2022 | | i 917,009 | | $ | i 9,168 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 26,729,124 | | $ | i 92,272,737 | | $ | i 88,143,742 |
| | | | | | | | | | | | | | | | | | | |
NINE MONTHS ENDED JUNE 2023 | | | | | | | | | | | | | | | | | | | |
Balance, October 1, 2022 | | i 917,009 | | $ | i 9,168 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 26,903,201 | | $ | i 96,784,353 | | $ | i 92,829,435 |
Dividends on common stock, $ i 5.54 per share | | — | | | — | | — | | | — | | | — | | | ( i 3,423,089) | | | ( i 3,423,089) |
Compensation expense and settlement of equity-based awards | | i 26,263 | | | i 263 | | — | | | — | | | i 3,272,776 | | | — | | | i 3,273,039 |
Committed repurchase of treasury stock | | — | | | — | | ( i 2,363) | | | ( i 404,876) | | | — | | | — | | | ( i 404,876) |
Net income available to common shareholders | | — | |
| — | | — | | | — | | | — | | | i 8,638,954 | | | i 8,638,954 |
Balance, June 30, 2023 | | i 943,272 | | $ | i 9,431 | | ( i 334,583) | | $ | ( i 31,272,163) | | $ | i 30,175,977 | | $ | i 102,000,218 | | $ | i 100,913,463 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the nine months ended June 30, 2023 and 2022
| | | | | | |
| | June | | June | ||
|
| 2023 |
| 2022 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income available to common shareholders | | $ | i 8,638,954 | | $ | i 12,052,045 |
Adjustments to reconcile net income available to common shareholders to net cash flows from (used in) operating activities: | | | | | | |
Depreciation | | | i 4,701,316 | | | i 2,486,613 |
Amortization | | | i 280,752 | | | i 28,355 |
Equity method investment earnings, net of tax | | | — | | | ( i 1,670,133) |
Gain on re-valuation of equity method investment to fair value | | | — | | | ( i 2,387,411) |
(Gain) loss on sales of property and equipment | | | ( i 133,159) | | | ( i 133,639) |
Equity-based compensation | | | i 1,940,631 | | | i 1,903,884 |
Deferred income taxes | | | i 809,616 | | | i 1,231,012 |
Provision for losses on doubtful accounts | | | ( i 7,697) | | | i 83,000 |
Inventory allowance | | | i 442,603 | | | i 688,902 |
Change in fair value of mandatorily redeemable non-controlling interest | | | i 864,684 | | | i 705,392 |
Changes in assets and liabilities, net of effects of business acquisition: | | | | | | |
Accounts receivable | | | ( i 8,026,950) | | | ( i 1,215,238) |
Inventories | | | ( i 12,294,118) | | | ( i 4,674,292) |
Prepaid and other current assets | | | ( i 745,490) | | | ( i 2,986,167) |
Equity method investment distributions | | | — | | | i 1,095,467 |
Other assets | | | ( i 569,683) | | | ( i 728,596) |
Accounts payable | | | i 10,360,228 | | | i 1,313,711 |
Accrued expenses and accrued wages, salaries and bonuses | | | i 1,487,971 | | | i 1,926,479 |
Other long-term liabilities | | | i 185,704 | | | ( i 690,693) |
Income taxes payable and receivable | | | i 1,572,253 | | | ( i 1,890,449) |
Net cash flows from (used in) operating activities | | | i 9,507,615 | | | i 7,138,242 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Purchase of property and equipment | | | ( i 6,759,929) | | | ( i 13,940,428) |
Proceeds from sales of property and equipment | | | i 151,307 | | | i 145,500 |
Principal payment received on note receivable | | | — | | | i 175,000 |
Cash acquired in business combination | | | — | | | i 7,958 |
Acquisition of Henry's (See Note 2) | | | ( i 54,865,303) | | | — |
Net cash flows from (used in) investing activities | | | ( i 61,473,925) | | | ( i 13,611,970) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Borrowings under revolving credit facilities | | | i 1,863,027,754 | | | i 1,393,048,057 |
Repayments under revolving credit facilities | | | ( i 1,810,914,231) | | | ( i 1,381,508,745) |
Proceeds from borrowings on long-term debt | | | i 7,000,000 | | | — |
Principal payments on long-term debt | | | ( i 1,011,559) | | | ( i 524,874) |
Proceeds from exercise of stock options | | | — | | | i 173,590 |
Dividends on common stock | | | ( i 3,423,089) | | | ( i 3,331,606) |
Settlement and withholdings of equity-based awards | | | — | | | ( i 1,280,749) |
Redemption and distributions to non-controlling interest | | | ( i 2,405,128) | | | ( i 20,600) |
Net cash flows from (used in) financing activities | | | i 52,273,747 | | | i 6,555,073 |
Net change in cash | | | i 307,437 | | | i 81,345 |
Cash, beginning of period | | | i 431,576 | | | i 519,591 |
Cash, end of period | | $ | i 739,013 | | $ | i 600,936 |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid during the period for interest | | $ | i 5,824,144 | | $ | i 1,201,073 |
Cash paid during the period for income taxes, net of refunds | |
| i 1,780,000 | |
| i 5,468,488 |
| | | | | | |
Supplemental disclosure of non-cash information: | | | | | | |
Equipment acquisitions classified in accounts payable | | $ | i 1,622,224 | | $ | i 123,801 |
Effect of business acquisition | | | — | | | i 23,308,624 |
Committed repurchase of treasury stock | | | i 404,876 | | | — |
Issuance of common stock in connection with the vesting and exercise of | | | i 2,044,805 | |
| i 2,280,783 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
AMCON Distributing Company and Subsidiaries
Notes to Condensed Consolidated Unaudited Financial Statements
i1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
iAMCON Distributing Company and Subsidiaries (“AMCON” or the “Company”) operate i two business segments:
| ● | Our wholesale distribution segment (“Wholesale Segment”) distributes consumer products and provides a full range of programs and services to our customers that are focused on helping them manage their business and increase their profitability. We serve customers in i 31 states and primarily operate in the Central, Rocky Mountain, Mid-South and Mid-Atlantic regions of the United States. |
| ● | Our retail health food segment (“Retail Segment”) operates i 17 health food retail stores located throughout the Midwest and Florida. |
WHOLESALE SEGMENT
Our Wholesale Segment is one of the largest wholesale distributors in the United States, serving approximately i 6,800 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over i 17,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery products, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In December 2022, Convenience Store News ranked us as the sixth ( i 6th) largest convenience store distributor in the United States based on annual sales.
Our Wholesale Segment offers retailers the ability to take advantage of manufacturer- and Company-sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distribution capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, inventory optimization and merchandising expertise, information systems, and accessing trade credit.
Our Wholesale Segment operates i eight distribution centers located in Illinois, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia. These distribution centers, combined with cross-dock facilities, include approximately i 1.1 million square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s, Kraft Heinz, and Mars Wrigley. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.
As further described in Note 2, on February 3, 2023, the Company closed on its acquisition of Henry’s Foods, Inc. (“Henry’s”), purchasing substantially all of Henry’s operating assets for approximately $ i 54.9 million.
RETAIL SEGMENT
Our Retail Segment, through our Healthy Edge Retail Group subsidiary, is a specialty retailer of natural/organic groceries and dietary supplements that focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.
We operate within the natural products retail industry, which is a subset of the United States grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.
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Our Retail Segment operates i 17 retail health food stores as Chamberlin’s Natural Foods, Akin’s Natural Foods, and Earth Origins Market. These stores carry over i 35,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise.
iFINANCIAL STATEMENTS
The Company’s fiscal year ends on September 30th, except for one non-wholly owned subsidiary whose fiscal year ends on the last Friday of September. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2022, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its consolidated subsidiaries. Additionally, the three month fiscal periods ended June 30, 2023 and June 30, 2022 have been referred to throughout this Quarterly Report as Q3 2023 and Q3 2022, respectively. The fiscal balance sheet dates as of June 30, 2023 and September 30, 2022 have been referred to as June 2023 and September 2022, respectively.
iACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models, and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for the Company) with early adoption permitted. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.
i2. ACQUISITION
On February 3, 2023, the Company, through its wholly owned subsidiary, LOL Foods, Inc., paid approximately $ i 54.9 million in cash to acquire substantially all of the operating assets of Henry’s, a wholesale distributor to convenience stores and other retail formats operating in Minnesota, North Dakota, South Dakota, Iowa, and Wisconsin. In connection with the transaction, the Company also assumed certain operating liabilities totaling approximately $ i 1.2 million, including approximately $ i 0.2 million of operating leases. The transaction was funded with borrowings from the Company’s existing bank group. Costs to effectuate the acquisition were not significant and were expensed as incurred. Strategically, the acquisition expands the Company’s footprint in the North Central portion of the United States and enhances the product and service offerings available to its customer base.
The Company paid cash consideration for the net acquired assets and their related values as of the acquisition date, measured in accordance with FASB Accounting Standards Codification (“ASC”) 805 – Business Combinations. In valuing identifiable intangible assets, the Company has estimated the fair value using the discounted cash flows methodology with the assistance of an independent valuation advisor. Inputs and projections used to measure the fair value as of the acquisition date included, but were not limited to, sales growth, gross profit estimates, royalty and customer retention rates, economic and industry conditions, working capital requirements and various other operational considerations.
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The following purchase price allocation reflects the Company’s provisional (preliminary) estimates and analyses and is subject to change during the measurement period, which is generally one year from the acquisition date. During Q3 2023, certain non-contingent components of the total purchase price were updated, which resulted in a reduction of the total purchase price by approximately $ i 0.1 million. This reduction was recorded as an adjustment to goodwill. All amounts are provisional and incomplete at the reporting date and may change materially in subsequent reporting periods during the measurement period while additional information is obtained, particularly as it relates to certain accounts receivable, property and equipment, inventory, other intangible assets and certain liability balances while final appraisal and valuation work is completed. Accordingly, any changes to the Company’s provisional recording of the transaction may materially impact its financial statements, including but not limited to its consolidated balance sheets, statements of operations, shareholders’ equity and cash flows, and related disclosures. All assets acquired and operating liabilities assumed have been recorded as a component of our Wholesale Segment.
Provisional (preliminary) amounts of identifiable assets and liabilities assumed:
i
| | | |
Accounts receivable | | $ | i 8,237,652 |
Inventories | | | i 16,060,965 |
Prepaid and other assets | | | i 400,964 |
Property and equipment | | | i 27,216,323 |
Other intangible assets | | | i 3,607,000 |
Liabilities assumed | | | ( i 1,157,976) |
Total identifiable net assets | | $ | i 54,364,928 |
| | | |
Total identifiable net assets | | $ | i 54,364,928 |
Goodwill | | | i 500,375 |
Consideration transferred | | $ | i 54,865,303 |
Accounts receivable were recorded at their fair value representing the amount we expect to collect, which also approximated the gross contractual values of such receivables at the acquisition date. Goodwill totaling approximately $ i 0.5 million arose from the acquisition and primarily represents synergies and economies of scale generated through reductions in selling, general, and administrative expenses. This goodwill has been assigned to the Company’s Wholesale Segment and is expected to be deductible for tax purposes.
The provisional (preliminary) value of other intangible assets acquired consisted of the following:
i
| | | | | | |
|
| Acquisition-Date |
| Useful Life | ||
Other Intangible Asset | | Fair Value | | (Years) | ||
Customer list | | $ | i 2,010,000 | | | i 15 |
Non-competition agreement | | | i 95,000 | | | i 5 |
Trade name | | | i 1,502,000 | | | i 7 |
| | $ | i 3,607,000 | | | |
iThe following table sets forth the unaudited supplemental financial data for Henry’s from the acquisition date through June 2023, which is included in the Company’s consolidated results for the nine months ended June 2023.
| | | |
Revenue | | $ | i 131,563,988 |
Net income available to common shareholders | | $ | i 1,288,462 |
9
The following table presents unaudited supplemental pro forma information assuming the Company acquired Henry’s on October 1, 2021, in addition to holding a i 64% interest in Team Sledd, LLC (“Team Sledd”) on October 1, 2021. These pro forma amounts do not purport to be indicative of the actual results that would have been obtained had the acquisitions occurred at that time.
i
| | | | | | | | | | | | |
|
| For the three months ended June 2023 |
| For the three months ended June 2022 |
| For the nine months ended June 2023 |
| For the nine months ended June 2022 | ||||
Revenue | | $ | i 696,489,427 | | $ | i 700,311,723 | | $ | i 1,951,264,477 | | $ | i 1,988,702,611 |
Net income available to common shareholders | | $ | i 3,944,379 | | $ | i 6,202,533 | | $ | i 8,838,866 | | $ | i 15,484,735 |
i3. INVENTORIES
Inventories in our Wholesale Segment consisted of finished goods and are stated at the lower of cost or net realizable value, utilizing FIFO and average cost methods. Inventories in our Retail Segment consisted of finished goods and are stated at the lower of cost or market using the retail method. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $ i 1.7 million at June 2023 and $ i 1.1 million at September 2022. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow-moving and discontinued products.
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i4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at June 2023 and September 2022 was as follows:
i
| | | | | | |
|
| June |
| September | ||
| | 2023 | | 2022 | ||
Wholesale Segment | | $ | i 5,778,325 | | $ | i 5,277,950 |
Other intangible assets at June 2023 and September 2022 consisted of the following:
i
| | | | | | |
|
| June |
| September | ||
| | 2023 | | 2022 | ||
Customer lists (Wholesale Segment) (less accumulated amortization of $ i 0.2 million at June 2023 and less than $ i 0.1 million at September 2022) | | $ | i 3,284,013 | | $ | i 1,401,945 |
Non-competition agreements (Wholesale Segment) (less accumulated amortization of $ i 0.1 million at June 2023 and less than $ i 0.1 million at September 2022) | | | i 222,753 | | | i 191,168 |
Tradename (Wholesale Segment) (less accumulated amortization of $ i 0.1 million at June 2023) | | | i 1,412,595 | | | — |
Trademarks and tradenames (Retail Segment) | | | i 500,000 | | | i 500,000 |
| | $ | i 5,419,361 | | $ | i 2,093,113 |
Goodwill and the trademarks and tradenames for our Retail Segment are considered to have indefinite useful lives and therefore no amortization has been recorded on these assets. Goodwill recorded on the Company’s consolidated balance sheets represent amounts allocated to its wholesale reporting unit which totaled approximately $ i 5.8 million and $ i 5.3 million at June 2023 and September 2022, respectively. The Company performs its annual impairment testing during the fourth fiscal quarter of each year or as circumstances change or necessitate. There have been no material changes to the Company’s impairment assessments since its fiscal year ended September 2022.
At June 2023, identifiable intangible assets considered to have finite lives were represented by customer lists which are being amortized over i 15 years, a non-competition agreement which is being amortized over i three years, a non-competition agreement which is being amortized over i five years, and a tradename in our Wholesale Segment that is being amortized over i seven years. These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted. Amortization expense related to these assets was approximately $ i 0.1 million and $ i 0.3 million for the three and nine month periods ended June 2023, respectively.
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Estimated future amortization expense related to identifiable intangible assets with finite lives was as follows at June 2023:
| | | |
| | June | |
|
| 2023 | |
Fiscal 2023 (1) | | $ | i 134,425 |
Fiscal 2024 | | | i 537,701 |
Fiscal 2025 | | | i 506,869 |
Fiscal 2026 | | | i 463,703 |
Fiscal 2027 | | | i 463,703 |
Fiscal 2028 and thereafter | | | i 2,812,960 |
| | $ | i 4,919,361 |
| (1) | Represents amortization for the remaining three months of Fiscal 2023. |
i5. DIVIDENDS
The Company paid cash dividends on its common stock totaling $ i 0.1 million and $ i 3.4 million for the three and nine month periods ended June 2023, respectively, and $ i 0.1 million and $ i 3.3 million for the three and nine month periods ended June 2022, respectively.
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i6. EARNINGS PER SHARE
Basic earnings per share available to common shareholders is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing net income available to common shareholders by the sum of the weighted average number of common shares outstanding and the weighted average dilutive equity awards.
i | | | | | | | | | | | | |
| | For the three months ended June | ||||||||||
| | 2023 | | 2022 | ||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Weighted average number of common shares outstanding | | | i 585,625 | | | i 585,625 | | | i 569,689 | | | i 569,689 |
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | | | — | | | i 12,965 | | | — | | | i 12,681 |
Weighted average number of shares outstanding | | | i 585,625 | | | i 598,590 | | | i 569,689 | | | i 582,370 |
Net income available to common shareholders | | $ | i 3,944,379 | | $ | i 3,944,379 | | $ | i 6,044,808 | | $ | i 6,044,808 |
| | | | | | | | | | | | |
Net earnings per share available to common shareholders | | $ | i 6.74 | | $ | i 6.59 | | $ | i 10.61 | | $ | i 10.38 |
| (1) | Diluted earnings per share calculation includes all equity-based awards deemed to be dilutive. |
| | | | | | | | | | | | |
| | For the nine months ended June | ||||||||||
| | 2023 | | 2022 | ||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Weighted average number of common shares outstanding | | | i 584,359 | | | i 584,359 | | | i 567,026 | | | i 567,026 |
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | | | — | | | i 9,121 | | | — | | | i 14,552 |
Weighted average number of shares outstanding | | | i 584,359 | | | i 593,480 | | | i 567,026 | | | i 581,578 |
Net income available to common shareholders | | $ | i 8,638,954 | | $ | i 8,638,954 | | $ | i 12,052,045 | | $ | i 12,052,045 |
| | | | | | | | | | | | |
Net earnings per share available to common shareholders | | $ | i 14.78 | | $ | i 14.56 | | $ | i 21.25 | | $ | i 20.72 |
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7. DEBT
The Company primarily finances its operations through i three credit facility agreements (the “AMCON Facility”, the “Team Sledd Facility” and the “Henry’s Facility”, and together, the “Facilities”) and long-term debt agreements with banks. In Q3 2023, the Company amended the Team Sledd Facility, increasing its aggregate borrowing capacity from $ i 70.0 million to $ i 80.0 million, extending the maturity date to March 2028, and adding certain real estate property as eligible borrowing collateral under the agreement.
At June 2023, the Facilities had a total combined borrowing capacity of $ i 300.0 million, including provisions for up to $ i 30.0 million in credit advances for certain inventory purchases, which are limited by accounts receivable and inventory qualifications, and the value of certain real estate collateral. The Henry’s Facility matures in February 2026, the AMCON Facility matures in June 2027 and the Team Sledd Facility matures in March 2028, each without a penalty for prepayment. Obligations under the Facilities are collateralized by substantially all of the Company’s respective equipment, intangibles, inventories, accounts receivable, and certain real estate. The Facilities each feature an unused commitment fee and springing financial covenants. Borrowings under the Facilities bear interest at either the bank’s prime rate or the Secured Overnight Financing Rate (“SOFR”), plus any applicable spreads.
The amount available for use from the Facilities at any given time is subject to a number of factors, including eligible accounts receivable and inventory balances that fluctuate day-to-day, as well as the value of certain real estate collateral. Based on the collateral and loan limits as defined in the Facility agreements, the credit limit of the combined Facilities at June 2023 was $ i 249.9 million, of which $ i 143.4 million was outstanding, leaving $ i 106.5 million available.
The average interest rate of the Facilities was i 6.75% at June 2023. For the nine months ended June 2023, the peak borrowings under the Facilities was $ i 159.7 million, and the average borrowings and average availability under the Facilities was $ i 124.3 million and $ i 83.8 million, respectively.
LONG-TERM DEBT
In addition to the Facilities, the Company also had the following long-term obligations at June 2023 and September 2022.
i
| | | | | | |
|
| June 2023 |
| September 2022 | ||
Unsecured note payable, interest payable at a fixed rate of i i 4.50 / % with quarterly installments of principal and interest of $ i i 49,114 / through June 2023 with remaining principal due September 2023 | | | i 852,642 | | | i 968,589 |
Note payable, interest payable at a fixed rate of i i 4.10 / % with monthly installments of principal and interest of $ i i 53,361 / through June 2033 with remaining principal due July 2033, collateralized by Team Sledd's principal office and warehouse | | | i 5,280,076 | | | i 5,572,766 |
Note payable, interest payable at a fixed rate of i i 3.25 / % with monthly installments of principal and interest of $ i i 17,016 / through August 2034 with remaining principal due September 2034, collateralized by Team Sledd's principal office and warehouse | | | i 1,927,167 | | | i 2,052,327 |
Note payable with monthly installments of principal and interest of $ i i 7,934 / through February 2025 with remaining principal due March 2025, and an effective variable rate of i 7.28% at June 2023, collateralized by certain of Team Sledd's equipment | | | i 312,040 | | | i 385,887 |
Note payable, interest payable at a fixed rate of i 6.04% with monthly installments of principal and interest of $ i 135,469 through February 2028, collateralized by certain of Henry's equipment | |
| i 6,596,085 | |
| — |
| |
| i 14,968,010 | |
| i 8,979,569 |
Less current maturities | |
| ( i 2,738,524) | |
| ( i 1,595,309) |
| | $ | i 12,229,486 | | $ | i 7,384,260 |
/
/12
The aggregate minimum principal maturities of the long-term debt for each of the next five fiscal years are as follows:
i
| | | |
Fiscal Year Ending |
| | |
2023 (1) | | $ | i 1,295,972 |
2024 | | | i 1,957,369 |
2025 | | | i 2,166,686 |
2026 | |
| i 2,073,198 |
2027 | | | i 2,187,857 |
2028 and thereafter | |
| i 5,286,928 |
| | $ | i 14,968,010 |
(1)Represents payments for the remaining three months of Fiscal 2023.
/
Cross Default and Co-Terminus Provisions
Team Sledd’s i three notes payable and the Team Sledd Facility contain cross default provisions. There were i no such cross defaults at June 2023. The Company was in compliance with all of its financial covenants under the Facilities at June 2023.
Other
The Company has issued a letter of credit for $ i 0.5 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.
i8. INCOME TAXES
The change in the Company’s effective income tax rate for the three and nine month periods ended June 2023 as compared to the respective prior year periods, was primarily related to non-deductible compensation expense in relation to the amount of income from operations before income tax expense and higher effective state income tax rates between the comparative periods.
i9. MANDATORILY REDEEMABLE NON-CONTROLLING INTEREST
Mandatorily redeemable non-controlling interest (“MRNCI”) recorded on the Company’s condensed consolidated balance sheet represents the non-controlling interest in the Company’s strategic investment in Team Sledd. During April 2023, Team Sledd redeemed certain membership interests from its non-controlling interest, which increased the Company’s ownership interest to approximately i 64% as of June 2023. The Company owned approximately i 56% of Team Sledd as of September 2022. The Company has elected to present the MRNCI liability at fair value under ASC 825 – Financial Instruments (“ASC 825”) as it believes this best represents the potential future liability and cash flows. As such, the MRNCI balance at June 2023 represents the fair value of the remaining future membership interest redemptions and other amounts due to noncontrolling interest holders through April 2026. The Company calculates the estimated fair value of the MRNCI based on a discounted cash flow valuation technique using the best information available at the reporting date, and records changes in the fair value of the MRNCI as a component of other expense (income) in the Condensed Consolidated Statements of Operations. The Company estimates the probability and timing of future redemptions and earnings of Team Sledd based on management’s knowledge and assumptions of certain events as of each reporting date, including the timing of any future redemptions and an appropriate discount rate. At June 2023, the difference between the contractual amount due under the MRNCI and the fair value was approximately $ i 0.7 million. The MRNCI is classified as Level 3 because of the Company’s reliance on unobservable assumptions. The following table presents changes in the fair value of the MRNCI since September 2022:
i
| | | |
Fair value of MRNCI as of September 2022 |
| $ | i 11,158,555 |
Redemption of non-controlling interests | | | ( i 1,812,558) |
Distributions to non-controlling interest | | | ( i 592,570) |
Change in fair value | | | i 864,684 |
Fair value of MRNCI as of June 2023 | | $ | i 9,618,111 |
Less current portion at fair value | | | ( i 1,641,612) |
| | $ | i 7,976,499 |
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10. BUSINESS SEGMENTS
The Company has i two reportable business segments: the wholesale distribution of consumer products which includes Team Sledd and Henry’s (the Wholesale Segment), and the retail sale of health and natural food products (the Retail Segment). The aggregation of the Company’s business operations into these business segments was based on a range of considerations, including but not limited to the characteristics of each business, similarities in the nature and type of products sold, customer classes, methods used to sell the products and economic profiles. Included in the “Other” column are intercompany eliminations, equity method investment earnings, net of tax and assets held and charges incurred and income earned by our holding company. The segments are evaluated on revenues, gross margins, operating income (loss), and income (loss) from operations before taxes. Certain amounts in prior periods have been reclassified to conform with the current presentation.
i
| | | | | | | | | | | | |
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
THREE MONTHS ENDED JUNE 2023 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | i 429,431,319 | | $ | — | | $ | — | | $ | i 429,431,319 |
Tobacco | | | i 124,894,734 | | | — | | | — | | | i 124,894,734 |
Confectionery | | | i 46,624,371 | | | — | | | — | | | i 46,624,371 |
Health food | | | — | | | i 10,745,108 | | | — | | | i 10,745,108 |
Foodservice & other | | | i 84,793,895 | | | — | | | — | | | i 84,793,895 |
Total external revenue | | | i 685,744,319 | | | i 10,745,108 | | | — | | | i 696,489,427 |
Depreciation | | | i 1,690,452 | | | i 278,552 | | | — | | | i 1,969,004 |
Amortization | | | i 134,425 | | | — | | | — | | | i 134,425 |
Operating income (loss) | | | i 11,772,692 | | | ( i 297,795) | | | ( i 3,564,070) | | | i 7,910,827 |
Interest expense | | | — | | | — | | | i 2,385,842 | | | i 2,385,842 |
Income (loss) from operations before taxes | | | i 11,148,619 | | | i 559,473 | | | ( i 5,949,913) | | | i 5,758,179 |
Total assets | | | i 349,564,773 | | | i 18,008,597 | | | i 1,133,985 | | | i 368,707,355 |
Capital expenditures | | | i 5,082,997 | | | i 405,694 | | | — | | | i 5,488,691 |
| | | | | | | | | | | | |
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
THREE MONTHS ENDED JUNE 2022 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | i 364,771,496 | | $ | — | | $ | — | | $ | i 364,771,496 |
Tobacco | | | i 93,957,495 | | | — | | | — | | | i 93,957,495 |
Confectionery | | | i 32,541,090 | | | — | | | — | | | i 32,541,090 |
Health food | | | — | | | i 11,350,797 | | | — | | | i 11,350,797 |
Foodservice & other | | | i 47,963,274 | | | — | | | — | | | i 47,963,274 |
Total external revenue | | | i 539,233,355 | | | i 11,350,797 | | | — | | | i 550,584,152 |
Depreciation | | | i 602,770 | | | i 281,376 | | | — | | | i 884,146 |
Amortization | | | i 28,355 | | | — | | | — | | | i 28,355 |
Operating income (loss) | | | i 9,432,660 | | | i 241,225 | | | ( i 2,772,099) | | | i 6,901,786 |
Interest expense | | | — | | | — | | | i 655,811 | | | i 655,811 |
Income (loss) from operations before taxes | | | i 8,732,244 | | | i 256,392 | | | ( i 1,030,801) | | | i 7,957,835 |
Equity method investment earnings, net of tax | | | — | | | — | | | i 307,973 | | | i 307,973 |
Total assets | | | i 278,824,259 | | | i 18,656,853 | | | i 814,291 | | | i 298,295,403 |
Capital expenditures | | | i 12,074,922 | | | i 985,835 | | | — | | | i 13,060,757 |
/ /14
| | | | | | | | | | | | |
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
NINE MONTHS ENDED JUNE 2023 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | i 1,161,352,954 | | $ | — | | $ | — | | $ | i 1,161,352,954 |
Tobacco | | | i 339,356,268 | | | — | | | — | | | i 339,356,268 |
Confectionery | | | i 115,820,426 | | | — | | | — | | | i 115,820,426 |
Health food | | | — | | | i 32,354,992 | | | — | | | i 32,354,992 |
Foodservice & other | | | i 198,588,142 | | | — | | | — | | | i 198,588,142 |
Total external revenue | | | i 1,815,117,790 | | | i 32,354,992 | | | — | | | i 1,847,472,782 |
Depreciation | | | i 3,884,128 | | | i 817,188 | | | — | | | i 4,701,316 |
Amortization | | | i 280,752 | | | — | | | — | | | i 280,752 |
Operating income (loss) | | | i 28,934,860 | | | ( i 392,963) | | | ( i 9,783,740) | | | i 18,758,157 |
Interest expense | | | — | | | — | | | i 6,249,540 | | | i 6,249,540 |
Income (loss) from operations before taxes | | | i 28,321,283 | | | i 514,952 | | | ( i 16,033,281) | | | i 12,802,954 |
Total assets | | | i 349,564,773 | | | i 18,008,597 | | | i 1,133,985 | | | i 368,707,355 |
Capital expenditures | | | i 7,499,029 | | | i 791,468 | | | — | | | i 8,290,497 |
| | | | | | | | | | | | |
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
NINE MONTHS ENDED JUNE 2022 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | i 900,677,466 | | $ | — | | $ | — | | $ | i 900,677,466 |
Tobacco | | | i 229,765,009 | | | — | | | — | | | i 229,765,009 |
Confectionery | | | i 79,691,881 | | | — | | | — | | | i 79,691,881 |
Health food | | | — | | | i 35,695,298 | | | — | | | i 35,695,298 |
Foodservice & other | | | i 119,213,967 | | | — | | | — | | | i 119,213,967 |
Total external revenue | | | i 1,329,348,323 | | | i 35,695,298 | | | — | | | i 1,365,043,621 |
Depreciation | | | i 1,589,102 | | | i 897,511 | | | — | | | i 2,486,613 |
Amortization | | | i 28,355 | | | — | | | — | | | i 28,355 |
Operating income (loss) | | | i 23,174,638 | | | i 1,448,878 | | | ( i 10,020,703) | | | i 14,602,813 |
Interest expense | | | — | | | — | | | i 1,222,829 | | | i 1,222,829 |
Income (loss) from operations before taxes | | | i 22,513,900 | | | i 1,469,705 | | | ( i 8,790,693) | | | i 15,192,912 |
Equity method investment earnings, net of tax | | | — | | | — | | | i 1,670,133 | | | i 1,670,133 |
Total assets | | | i 278,824,259 | | | i 18,656,853 | | | i 814,291 | | | i 298,295,403 |
Capital expenditures | | | i 12,718,606 | | | i 1,217,373 | | | — | | | i 13,935,979 |
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS UPDATE
Our businesses continue to be impacted by a number of macroeconomic factors including ongoing disruptions to supply chains which have impacted product and equipment availability. These factors, combined with a highly inflationary operating environment, have resulted in cost pressures across both of our business segments as product, labor, fuel, interest and other costs have all increased markedly while at the same time pressuring consumer demand trends.
We continue to closely monitor proposals from governmental and regulatory bodies, including the United States Food and Drug Administration (“FDA”), which are evaluating the possible prohibition and/or limitations on the sale of certain cigarette, tobacco and vaping products, including menthol. If such regulations were to be implemented, they would have a negative impact on the Company’s financial results.
Integration work related to the Company’s recent purchase of Henry’s Foods, Inc. (“Henry’s”) remains ongoing. The acquisition of Henry’s has expanded the Company’s geographic footprint and has provided access to an industry- leading foodservice distribution platform.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect(s),” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions.
It should be understood that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:
| ● | risks associated with higher interest rates and the related impact on profitability and cash flows for both the Company and its customer base, particularly as it relates to variable interest rate borrowings, as well as risk that such borrowings may not be renewed in the future on favorable terms or at all, |
| ● | risks associated with any systemic pressures in the banking system, particularly as they relate to customer credit risk and any resulting impact on our cash flow and our ability to collect on our receivables, |
| ● | risks associated with an inflationary operating environment, particularly as it relates to wages, fuel, interest, and commodity prices, which impact our operating cost structure and could impact food ingredient costs and demand for many of the products we sell, |
| ● | regulations, potential bans and/or litigation related to the manufacturing, distribution, and sale of certain cigarette, tobacco, and vaping products imposed by the FDA, state or local governmental agencies, or other parties, including proposed forthcoming regulations around the manufacture and distribution of certain menthol and flavored tobacco products, |
| ● | risks associated with the threat or occurrence of epidemics or pandemics (such as COVID-19 or its variants) or other public health issues, including the continued health of our employees and management, the reduced demand for our goods and services or increased credit risk from customer credit defaults resulting from an economic downturn, |
16
| ● | risks associated with the imposition of governmental orders restricting our operations and the operations of our suppliers and customers, in particular, disruptions to our supply chain or our ability to procure products or fulfill orders due to labor shortages in our warehouse operations, |
| ● | risks associated with the Company’s business model which experienced both higher sales volumes and labor costs during the COVID-19 pandemic, and the risk of sales returning to pre-pandemic levels without the Company being able to offset increases in its cost structure, |
| ● | risks associated with the acquisition of assets, new businesses or equity investments by either of our business segments including, but not limited to, risks associated with consummating such transactions on expected terms or timing, purchase price and business valuation and recording risks, and risks related to the assumption of certain liabilities or obligations, |
| ● | risks associated with the integration of new businesses or equity investments by either of our business segments including, but not limited to, risks associated with vendor and customer retention, technology integration, and the potential loss of any key management personnel or employees, |
| ● | increasing competition and market conditions in our wholesale and retail health food businesses and any associated impact on the carrying value and any potential impairment of assets (including intangible assets) within those businesses, |
| ● | risk that our repositioning strategy for our retail business will not be successful, |
| ● | risks associated with opening new retail stores, |
| ● | if online shopping formats such as Amazon™ continue to grow in popularity and further disrupt traditional sales channels, it may present a significant direct risk to our brick and mortar retail business and potentially to our wholesale distribution business, |
| ● | the potential impact that ongoing, decreasing, or changing trade tariff and trade policies may have on our product costs or on consumer disposable income and demand, |
| ● | increasing product and operational costs resulting from ongoing supply chain disruptions, an intensely competitive labor market with a limited pool of qualified workers, and higher incremental costs associated with the handling and transportation of certain product categories such as foodservice, |
| ● | increases in state and federal excise taxes on cigarette and tobacco products and the potential impact on demand, particularly as it relates to current legislation under consideration which could significantly increase such taxes, |
| ● | risks associated with disruptions to our technology systems or those of third parties upon which we rely, including security breaches, cyber and ransomware attacks, malware, or other methods by which such information systems could or may have been compromised or impacted, |
| ● | increases in inventory carrying costs and customer credit risks, |
| ● | changes in pricing strategies and/or promotional/incentive programs offered by cigarette and tobacco manufacturers, |
| ● | changing demand for the Company’s products, particularly cigarette, tobacco and vaping products, |
| ● | risks that product manufacturers may begin selling directly to convenience stores and bypass wholesale distributors, |
| ● | changes in laws and regulations and ongoing compliance related to health care and associated insurance, |
| ● | increasing health care costs for both the Company and consumers and their potential impact on discretionary consumer spending, |
| ● | decreased availability of capital resources, |
17
| ● | domestic regulatory and legislative risks, |
| ● | poor weather conditions, and the adverse effects of climate change, |
| ● | consolidation trends within the convenience store, wholesale distribution, and retail health food industries, |
| ● | natural disasters, domestic/political unrest and incidents of violence, or any restrictions, regulations, or security measures implemented by governmental bodies in response to these items, and |
| ● | other risks over which the Company has little or no control, and any other factors not identified herein. |
Changes in these factors could result in significantly different results. Consequently, future results may differ from management’s expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward-looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward-looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company’s condensed consolidated unaudited financial statements (“financial statements”) require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2022, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these estimates and related policies during the nine months ended June 2023.
THIRD FISCAL QUARTER 2023 (Q3 2023)
The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2023 and June 2022:
Wholesale Segment
Our Wholesale Segment is one of the largest wholesale distributors in the United States, serving approximately 6,800 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 17,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery products, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In December 2022, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.
Our Wholesale Segment offers retailers the ability to take advantage of manufacturer- and Company-sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distribution capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, inventory optimization and merchandising expertise, information systems, and accessing trade credit.
Our Wholesale Segment operates eight distribution centers located in Illinois, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia. These distribution centers, combined with cross-dock facilities, include approximately 1.1 million square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s, Kraft Heinz, and Mars Wrigley. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.
18
Retail Segment
Our Retail Segment, through our Healthy Edge Retail Group subsidiary, is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.
We operate within the natural products retail industry, which is a subset of the United States grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.
Our Retail Segment operates 17 retail health food stores as Chamberlin’s Natural Foods, Akin’s Natural Foods, and Earth Origins Market. These stores carry over 35,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise.
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE:
| | | | | | | | | | | |
|
| 2023 |
| 2022 |
| Incr (Decr) |
| % Change | |||
CONSOLIDATED: | | | | | | | | | | | |
Sales (1) | | $ | 696,489,427 | | $ | 550,584,152 | | $ | 145,905,275 |
| 26.5 |
Cost of sales | |
| 649,623,651 | |
| 516,907,540 | |
| 132,716,111 |
| 25.7 |
Gross profit | |
| 46,865,776 | |
| 33,676,612 | |
| 13,189,164 |
| 39.2 |
Gross profit percentage | |
| 6.7 | % |
| 6.1 | % |
| | | |
| | | | | | | | | | | |
Operating expense | | $ | 38,954,949 | | $ | 26,774,826 | | $ | 12,180,123 |
| 45.5 |
Operating income | |
| 7,910,827 | |
| 6,901,786 | |
| 1,009,041 |
| 14.6 |
Interest expense | |
| 2,385,842 | |
| 655,811 | |
| 1,730,031 |
| 263.8 |
Change in fair value of mandatorily redeemable non-controlling interest | | | 698,571 | | | 705,392 | | | (6,821) | | (1.0) |
Income tax expense | |
| 1,813,800 | |
| 2,221,000 | |
| (407,200) |
| (18.3) |
Equity method investment earnings, net of tax | | | — | | | 307,973 | | | (307,973) | | (100.0) |
Net income available to common shareholders | |
| 3,944,379 | |
| 6,044,808 | |
| (2,100,429) |
| (34.7) |
| | | | | | | | | | | |
BUSINESS SEGMENTS: | | | | | | | | | | | |
Wholesale | | | | | | | | | | | |
Sales | | $ | 685,744,319 | | $ | 539,233,355 | | $ | 146,510,964 |
| 27.2 |
Gross profit | |
| 43,093,210 | |
| 29,442,578 | |
| 13,650,632 |
| 46.4 |
Gross profit percentage | |
| 6.3 | % |
| 5.5 | % |
| | | |
Retail | | | | | | | | | | | |
Sales | | $ | 10,745,108 | | $ | 11,350,797 | | $ | (605,689) |
| (5.3) |
Gross profit | |
| 3,772,566 | |
| 4,234,034 | |
| (461,468) |
| (10.9) |
Gross profit percentage | |
| 35.1 | % |
| 37.3 | % |
| | | |
| (1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $10.9 million in Q3 2023 and $9.0 million in Q3 2022. |
19
SALES
Changes in sales are primarily driven by:
| (i) | changes to selling prices, which are largely controlled by our product suppliers, and excise taxes imposed on cigarettes and tobacco products by various states; |
| (ii) | changes in the volume and mix of products sold to our customers, either due to a change in purchasing patterns resulting from consumer preferences or the fluctuation in the comparable number of business days in our reporting period; and |
SALES – Q3 2023 vs. Q3 2022
Sales in our Wholesale Segment increased $146.5 million during Q3 2023 as compared to Q3 2022. Significant items impacting sales during Q3 2023 included a $50.3 million increase in comparative sales related to the acquisition of a controlling interest in Team Sledd, LLC (“Team Sledd”) during Q3 2022, a $87.6 million increase in sales related to the acquisition of Henry’s during Q2 2023, a $28.0 million increase in sales related to price increases implemented by cigarette manufacturers, and a $14.4 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), partially offset by a $33.8 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment decreased $0.6 million during Q3 2023 as compared to Q3 2022. This decrease was due to approximately $0.7 million related to the temporary closure of our Port Charlotte store due to damage from Hurricane Ian and approximately $0.4 million related to the closure of two stores between the comparative periods, partially offset by a $0.5 million increase related to higher sales volumes in our existing stores.
GROSS PROFIT – Q3 2023 vs. Q3 2022
Our gross profit does not include fulfillment costs and costs related to the distribution network, which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.
Gross profit in our Wholesale Segment increased $13.7 million during Q3 2023 as compared to Q3 2022. Significant items impacting gross profit during Q3 2023 included an $3.0 million increase in comparative gross profit related to the acquisition of a controlling interest in Team Sledd during Q3 2022, a $10.1 million increase in gross profit related to the acquisition of Henry’s in Q2 2023, a $1.1 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, partially offset by a $0.5 million decrease in gross profit due to the timing and related benefits of cigarette manufacturer price increases and the volume and mix of cigarette cartons sold between the comparative periods. Gross profit in our Retail Segment decreased $0.5 million during Q3 2023 as compared to Q3 2022. This change was primarily related to a $0.3 million decrease related to the temporary closure of our Port Charlotte store due to damage from Hurricane Ian, a $0.1 million decrease related to the closure of two stores between the comparative periods and a $0.1 million decrease in realized margins in our existing stores.
OPERATING EXPENSE – Q3 2023 vs. Q3 2022
Operating expense includes selling, general and administrative expenses and depreciation. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q3 2023 operating expenses increased $12.2 million as compared to Q3 2022. Significant items impacting operating expenses during Q3 2023 included a $2.2 million increase in comparative operating expenses related to the acquisition of a controlling interest in Team Sledd during Q3 2022, a $7.5 million increase in operating expenses related to the acquisition of Henry’s during Q2 2023, a $1.2 million increase related to employee compensation and benefit costs, a $0.9 million increase in insurance costs, a $0.6 million increase in other Wholesale Segment operating expenses, a $0.3
20
million increase in customer bad debt expense, and a $0.1 million increase in operating expenses in our Retail Segment, partially offset by a $0.6 million decrease in fuel costs.
INTEREST EXPENSE – Q3 2023 vs. Q3 2022
Interest expense increased $1.7 million in Q3 2023 as compared to Q3 2022, primarily related to higher interest rates and higher outstanding debt balances in the current period related to the acquisition of a controlling interest in Team Sledd in Q3 2022 and the acquisition of Henry’s in Q2 2023.
OTHER INCOME – Q3 2023 vs. Q3 2022
The change in other income between the comparative periods was primarily related to a non-cash gain of approximately $2.4 million in the prior year period (Q3 2022) related to the consolidation of Team Sledd, partially offset by an insurance recovery in the current year period.
INCOME TAX EXPENSE – Q3 2023 vs. Q3 2022
The change in the Q3 2023 income tax rate as compared to Q3 2022 was primarily related to non-deductible compensation expense in relation to the amount of income from operations before income tax expense and higher effective state income tax rates between the comparative periods.
RESULTS OF OPERATIONS – NINE MONTHS ENDED JUNE:
| | | | | | | | | | | |
|
| 2023 |
| 2022 |
| Incr (Decr) |
| % Change | |||
CONSOLIDATED: | | | | | | | | | | | |
Sales(1) | | $ | 1,847,472,782 | | $ | 1,365,043,621 | | $ | 482,429,161 |
| 35.3 |
Cost of sales | | | 1,724,504,862 | | | 1,277,757,425 | | | 446,747,437 |
| 35.0 |
Gross profit | | | 122,967,920 | | | 87,286,196 | | | 35,681,724 |
| 40.9 |
Gross profit percentage | | | 6.7 | % | | 6.4 | % | | | | |
| | | | | | | | | | | |
Operating expense | | $ | 104,209,763 | | $ | 72,683,383 | | $ | 31,526,380 |
| 43.4 |
Operating income | | | 18,758,157 | | | 14,602,813 | | | 4,155,344 |
| 28.5 |
Interest expense | | | 6,249,540 | | | 1,222,829 | | | 5,026,711 |
| 411.1 |
Change in fair value of mandatorily redeemable non-controlling interest | | | 864,684 | | | 705,392 | | | 159,292 | | 22.6 |
Income tax expense | | | 4,164,000 | | | 4,811,000 | | | (647,000) |
| (13.4) |
Equity method investment earnings, | | | — | | | 1,670,133 | | | (1,670,133) |
| (100.0) |
Net income available to common shareholders | | | 8,638,954 | | | 12,052,045 | | | (3,413,091) |
| (28.3) |
| | | | | | | | | | | |
BUSINESS SEGMENTS: | | | | | | | | | | | |
Wholesale | | | | | | | | | | | |
Sales | | $ | 1,815,117,790 | | $ | 1,329,348,323 | | $ | 485,769,467 |
| 36.5 |
Gross profit | | | 111,464,919 | | | 73,761,372 | | | 37,703,547 |
| 51.1 |
Gross profit percentage | | | 6.1 | % | | 5.5 | % | | | | |
Retail | | | | | | | | | | | |
Sales | | $ | 32,354,992 | | $ | 35,695,298 | | $ | (3,340,306) |
| (9.4) |
Gross profit | |
| 11,503,001 | |
| 13,524,824 | |
| (2,021,823) |
| (14.9) |
Gross profit percentage | |
| 35.6 | % |
| 37.9 | % | | | | |
| (1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $30.1 million for the nine months ended June 2023 and $24.2 million for the nine months ended June 2022. |
21
SALES – Nine months ended June 2023
Sales in our Wholesale Segment increased $485.8 million for the nine months ended June 2023 as compared to the same prior year period. Significant items impacting sales during the period included a $362.4 million increase in comparative sales related to the acquisition of a controlling interest in Team Sledd during Q3 2022, a $131.6 million increase in sales related to the acquisition of Henry’s during Q2 2023, a $69.6 million increase in sales related to price increases implemented by cigarette manufacturers and a $32.5 million increase in sales related to higher sales volumes in our Other Products category, partially offset by a $110.3 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment decreased $3.3 million for the nine months ended June 2023 as compared to the same prior year period. Significant items impacting sales in our Retail Segment included a decrease of $2.4 million related to the temporary closure of our Port Charlotte store due to damage from Hurricane Ian and a decrease of $1.5 million related to the closure of two stores between the comparative periods, partially offset by a $0.6 million increase related to higher sales volumes in our existing stores.
GROSS PROFIT – Nine months ended June 2023
Gross profit in our Wholesale Segment increased $37.7 million for the nine months ended June 2023 as compared to the same prior year period. Significant items impacting gross profit during the period included a $20.8 million increase in comparative gross profit related to the acquisition of a controlling interest in Team Sledd during Q3 2022, a $14.9 million increase in gross profit related to the acquisition of Henry’s in Q2 2023, a $3.1 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, partially offset by a $1.1 million decrease in the net impact of cigarette manufacturer promotions and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment decreased $2.0 million for the nine months ended June 2023 as compared to the same prior year period. This change was primarily related to a $0.9 decrease related to the temporary closure of our Port Charlotte store due to damage from Hurricane Ian, a $0.5 million decrease related to the closure of two stores between the comparative periods and a $0.6 million decrease in realized margins in our existing stores.
OPERATING EXPENSE – Nine months ended June 2023
Operating expenses increased $31.5 million during the nine months ended June 2023 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $16.0 million increase in comparative operating expenses related to the acquisition of a controlling interest in Team Sledd during Q3 2022, a $12.1 million increase in operating expenses related to the acquisition of Henry’s during Q2 2023, a $2.4 million increase in other Wholesale Segment operating expenses including employee compensation and benefit costs, and a $1.2 million increase in insurance costs, partially offset by a $0.2 million decrease in our Retail Segment operating expenses.
INTEREST EXPENSE – Nine months ended June 2023
Interest expense increased $5.0 million for the nine months ended June 2023 as compared to the same prior year period, primarily related to higher interest rates and higher outstanding debt balances in the current year period related to the acquisition of a controlling interest in Team Sledd in Q3 2022 and the acquisition of Henry’s in Q2 2023.
OTHER INCOME – Nine months ended June 2023
The change in other income between the comparative periods was primarily related to a non-cash gain of approximately $2.4 million in the nine month period ended June 2022 related to the consolidation of Team Sledd, partially offset by an insurance recovery in the current year period.
INCOME TAX EXPENSE – Nine months ended June 2023
The change in the Company’s effective income tax rate during the nine month period ended June 2023 as compared to the respective prior year period was primarily related to higher non-deductible compensation and higher effective state income tax rates during the current year period.
22
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s variability in cash flows from operating activities is dependent on the timing of inventory purchases and seasonal fluctuations. For example, periodically we have inventory “buy-in” opportunities which offer more favorable pricing terms. As a result, we may have to hold inventory for a period longer than the payment terms. This generates a cash outflow from operating activities that we expect to reverse in later periods. Additionally, during our peak time of operations in the warm weather months, we generally carry higher amounts of inventory to ensure high fill rates and customer satisfaction.
The Company primarily finances its operations through three credit facility agreements (the “AMCON Facility”, the “Team Sledd Facility” and the “Henry’s Facility”, and together, the “Facilities”) and long-term debt agreements with banks. In Q3 2023, the Company amended the Team Sledd Facility, increasing its aggregate borrowing capacity from $70.0 million to $80.0 million, extending the maturity date to March 2028, and adding certain real estate property as eligible borrowing collateral under the agreement.
At June 2023, the Facilities had a total combined borrowing capacity of $300.0 million, including provisions for up to $30.0 million in credit advances for certain inventory purchases, which are limited by accounts receivable and inventory qualifications, and the value of certain real estate collateral. The Henry’s Facility matures in February 2026, the AMCON Facility matures in June 2027, and the Team Sledd Facility matures in March 2028, each without a penalty for prepayment. Obligations under the Facilities are collateralized by substantially all of the Company’s respective equipment, intangibles, inventories, accounts receivable, and certain real estate. The Facilities each feature an unused commitment fee and springing financial covenants. Borrowings under the Facilities bear interest at either the bank’s prime rate or the Secured Overnight Financing Rate (“SOFR”), plus any applicable spreads.
The amount available for use from the Facilities at any given time is subject to a number of factors, including eligible accounts receivable and inventory balances that fluctuate day-to-day, as well as the value of certain real estate collateral. Based on the collateral and loan limits as defined in the Facility agreements, the credit limit of the combined Facilities at June 2023 was $249.9 million, of which $143.4 million was outstanding, leaving $106.5 million available.
The average interest rate of the Facilities was 6.75% at June 2023. For the nine months ended June 2023, the peak borrowings under the Facilities was $159.7 million, and the average borrowings and average availability under the Facilities was $124.3 million and $83.8 million, respectively.
Cross Default and Co-Terminus Provisions
Team Sledd’s three notes payable and the Team Sledd Facility contain cross default provisions. There were no such cross defaults at June 2023. The Company was in compliance with all of its financial covenants under the Facilities at June 2023.
Dividend Payments
The Company paid cash dividends on its common stock totaling $0.1 million and $3.4 million for the three and nine month periods ended June 2023, respectively, and $0.1 million and $3.3 million for the three and nine month periods ended June 2022, respectively.
Other
The Company has issued a letter of credit for $0.5 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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Liquidity Risk
The Company’s liquidity position is significantly influenced by its ability to maintain sufficient levels of working capital. For our Company and our industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.
The Company does not currently hedge its exposure to interest rate risk or fuel costs. Accordingly, significant price movements in these areas can and do impact the Company’s profitability.
While the Company believes its liquidity position going forward will be adequate to sustain operations in both the short- and long-term, a precipitous change in operating environment could materially impact the Company’s future revenue streams as well as its ability to collect on customer accounts receivable or secure bank credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2023 was made under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.
The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
Other than the ongoing implementation of internal controls over financial reporting related to the acquisition of Henry’s, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A “Risk Factors” of the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
(a) Exhibits
| ||
| | |
| 10.1 | |
| | |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32.1 | |
| | |
| 32.2 | |
| | |
| 101 | Interactive Data File (filed herewith electronically) |
| | |
| 104 | Cover Page Interactive Data File – formatted in Inline XBRL and included as Exhibit 101 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AMCON DISTRIBUTING COMPANY |
| (registrant) |
| |
Date: July 18, 2023 | |
| |
| Chief Executive Officer and Chairman |
| |
Date: July 18, 2023 | |
| |
| Vice President, Chief Financial Officer and Secretary |
| (Principal Financial and Accounting Officer) |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| Filed on: | 7/18/23 | 8-K | ||
| 7/17/23 | ||||
| For Period end: | 6/30/23 | |||
| 4/1/23 | ||||
| 2/3/23 | ||||
| 12/15/22 | ||||
| 10/1/22 | ||||
| 9/30/22 | 10-K | |||
| 6/30/22 | 10-Q, 8-K | |||
| 4/1/22 | ||||
| 10/1/21 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/08/23 Amcon Distributing Co. 10-K 9/30/23 94:9.3M Toppan Merrill Bridge/FA |