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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 7/18/22 Amcon Distributing Co. 10-Q 6/30/22 66:7.7M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.61M
2: EX-10.2 Material Contract HTML 79K
3: EX-10.3 Material Contract HTML 856K
4: EX-10.4 Material Contract HTML 107K
5: EX-10.5 Material Contract HTML 54K
6: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
7: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
9: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
15: R1 Document and Entity Information HTML 72K
16: R2 Condensed Consolidated Balance Sheets HTML 143K
17: R3 Condensed Consolidated Balance Sheets HTML 32K
(Parenthetical)
18: R4 Condensed Consolidated Unaudited Statements of HTML 112K
Operations
19: R5 Condensed Consolidated Unaudited Statements of HTML 21K
Operations (Parenthetical)
20: R6 Condensed Consolidated Unaudited Statements of HTML 80K
Shareholders' Equity
21: R7 Condensed Consolidated Unaudited Statements of HTML 21K
Shareholders' Equity (Parenthetical)
22: R8 Condensed Consolidated Unaudited Statements of HTML 139K
Cash Flows
23: R9 Summary of Significant Accounting Policies and HTML 35K
Basis of Presentation
24: R10 Acquisition HTML 57K
25: R11 Inventories HTML 22K
26: R12 Goodwill and Other Intangible Assets HTML 55K
27: R13 Dividends HTML 21K
28: R14 Earnings Per Share HTML 80K
29: R15 Debt HTML 59K
30: R16 Income Taxes HTML 24K
31: R17 Supplemental Pro Forma Information HTML 59K
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33: R19 Common Stock Repurchases HTML 21K
34: R20 Subsequent Event HTML 22K
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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, 2022 |
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 584,789 shares of its $.01 par value common stock outstanding as of July 15, 2022.
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, 2022 and September 30, 2021
| | | | | | |
| | June | | September | ||
|
| 2022 |
| 2021 | ||
| | (Unaudited) | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash | | $ | i 600,936 | | $ | i 519,591 |
Accounts receivable, less allowance for doubtful accounts of $ i 2.6 million at June 2022 and $ i 0.9 million September 2021 | |
| i 66,500,582 | |
| i 35,844,163 |
Inventories, net | |
| i 142,093,610 | |
| i 95,212,085 |
Income taxes receivable | | | i 468,289 | | | — |
Prepaid expenses and other current assets | |
| i 10,343,497 | |
| i 4,999,125 |
Total current assets | |
| i 220,006,914 | |
| i 136,574,964 |
| | | | | | |
Property and equipment, net | |
| i 48,452,634 | |
| i 16,012,524 |
Operating lease right-of-use assets, net | | | i 19,672,900 | | | i 17,846,529 |
Note receivable, net of current portion | | | — | | | i 3,325,000 |
Goodwill | |
| i 5,277,950 | |
| i 4,436,950 |
Other intangible assets, net | |
| i 2,135,645 | |
| i 500,000 |
Equity method investment | | | — | | | i 9,380,343 |
Other assets | |
| i 2,749,360 | |
| i 334,819 |
Total assets | | $ | i 298,295,403 | | $ | i 188,411,129 |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | i 40,975,820 | | $ | i 24,235,042 |
Accrued expenses | |
| i 13,339,837 | |
| i 11,468,955 |
Accrued wages, salaries and bonuses | |
| i 7,346,300 | |
| i 4,489,852 |
Income taxes payable | |
| — | |
| i 867,160 |
Current operating lease liabilities | | | i 6,204,257 | | | i 5,513,390 |
Current maturities of long-term debt | |
| i 1,204,348 | |
| i 561,202 |
Total current liabilities | |
| i 69,070,562 | |
| i 47,135,601 |
| | | | | | |
Credit facilities | |
| i 101,228,521 | |
| i 43,650,865 |
Deferred income tax liability, net | |
| i 2,938,240 | |
| i 1,531,228 |
Long-term operating lease liabilities | | | i 13,759,819 | | | i 12,669,157 |
Long-term debt, less current maturities | |
| i 12,159,895 | |
| i 5,054,265 |
Other long-term liabilities | |
| i 66,694 | |
| i 757,387 |
| | | | | | |
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 584,789 shares outstanding at June 2022 and i 551,369 shares outstanding at September 2021 | |
| i 9,168 | |
| i 8,834 |
Additional paid-in capital | |
| i 26,729,124 | |
| i 24,918,781 |
Retained earnings | |
| i 92,210,760 | |
| i 83,552,298 |
Treasury stock at cost | |
| ( i 30,867,287) | |
| ( i 30,867,287) |
Total parent shareholders’ equity | |
| i 88,081,765 | |
| i 77,612,626 |
Non-controlling interest | | | i 10,989,907 | | | — |
Total shareholders’ equity | | | i 99,071,672 | | | i 77,612,626 |
Total liabilities and shareholders’ equity | | $ | i 298,295,403 | | $ | i 188,411,129 |
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, 2022 and 2021
| | | | | | | | | | | | |
| | For the three months ended June | | For the nine months ended June | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Sales (including excise taxes of $ i 129.2 million and $ i 104.9 million, and $ i 315.5 million and $ i 297.4 million, respectively) | | $ | i 550,584,152 | | $ | i 438,313,030 | | $ | i 1,365,043,621 | | $ | i 1,221,571,294 |
Cost of sales | |
| i 516,907,540 | |
| i 412,771,324 | |
| i 1,277,757,425 | |
| i 1,149,594,823 |
Gross profit | |
| i 33,676,612 | |
| i 25,541,706 | |
| i 87,286,196 | |
| i 71,976,471 |
Selling, general and administrative expenses | |
| i 25,862,325 | |
| i 20,501,117 | |
| i 70,168,415 | |
| i 58,123,100 |
Depreciation and amortization | |
| i 912,501 | |
| i 741,180 | |
| i 2,514,968 | |
| i 2,295,390 |
| |
| i 26,774,826 | |
| i 21,242,297 | |
| i 72,683,383 | |
| i 60,418,490 |
Operating income | |
| i 6,901,786 | |
| i 4,299,409 | |
| i 14,602,813 | |
| i 11,557,981 |
| | | | | | | | | | | | |
Other expense (income): | | | | | | | | | | | | |
Interest expense | |
| i 655,811 | |
| i 329,929 | |
| i 1,222,829 | |
| i 1,016,902 |
Other (income), net | |
| ( i 2,417,252) | |
| ( i 43,437) | |
| ( i 2,518,320) | |
| ( i 169,525) |
| |
| ( i 1,761,441) | |
| i 286,492 | |
| ( i 1,295,491) | |
| i 847,377 |
Income from operations before income taxes | |
| i 8,663,227 | |
| i 4,012,917 | |
| i 15,898,304 | |
| i 10,710,604 |
Income tax expense | |
| i 2,397,000 | |
| i 1,076,000 | |
| i 4,987,000 | |
| i 2,916,000 |
Equity method investment earnings, net of tax | |
| i 307,973 | |
| i 754,293 | |
| i 1,670,133 | |
| i 1,403,124 |
Net income | | | i 6,574,200 | | | i 3,691,210 | | | i 12,581,437 | | | i 9,197,728 |
Less: Net income attributable to non-controlling interest | | | ( i 591,369) | | | — | | | ( i 591,369) | | | — |
Net income available to common shareholders | | $ | i 5,982,831 | | $ | i 3,691,210 | | $ | i 11,990,068 | | $ | i 9,197,728 |
| | | | | | | | | | | | |
Basic earnings per share available to common shareholders | | $ | i 10.50 | | $ | i 6.69 | | $ | i 21.15 | | $ | i 16.71 |
Diluted earnings per share available to common shareholders | | $ | i 10.27 | | $ | i 6.48 | | $ | i 20.62 | | $ | i 16.37 |
| | | | | | | | | | | | |
Basic weighted average shares outstanding | |
| i 569,689 | |
| i 551,369 | |
| i 567,026 | |
| i 550,276 |
Diluted weighted average shares outstanding | |
| i 582,370 | |
| i 569,481 | |
| i 581,578 | |
| i 561,940 |
| |
| | | | | | | | | | |
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, 2022 and 2021
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | Non-controlling | | | | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Interest |
| Total | ||||||
THREE MONTHS ENDED JUNE 2021 | | | | | | | | | | | | | | | | | | | | | | |
Balance, April 1, 2021 | | i 883,589 | | $ | i 8,834 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 24,917,765 | | $ | i 73,724,722 | | $ | — | | $ | i 67,784,034 |
Dividends on common stock, $ i 0.18 per share | | — | | | — | | — | | | — | | | — | | | ( i 105,586) | | | — | | | ( i 105,586) |
Compensation expense and settlement of equity-based awards | | — | | | — | | — | | | — | | | i 25,527 | | | — | | | — | | | i 25,527 |
Net income | | — | |
| — | | — | | | — | | | — | | | i 3,691,210 | | | — | | | i 3,691,210 |
Balance, June 30, 2021 | | i 883,589 | | $ | i 8,834 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 24,943,292 | | $ | i 77,310,346 | | $ | — | | $ | i 71,395,185 |
| | | | | | | | | | | | | | | | | | | | | | |
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 and settlement of equity-based awards | | — | | | — | | — | | | — | | | i 174,078 | | | — | | | — | | | i 174,078 |
Fair value measurement of non-controlling interest | | — | | | — | | — | | | — | | | — | | | — | | | i 10,419,138 | | | i 10,419,138 |
Distributions | | — | | | — | | — | | | — | | | — | | | — | | | ( i 20,600) | | | ( i 20,600) |
Net income | | — | |
| — | | — | | | — | | | — | | | i 5,982,831 | | | i 591,369 | | | i 6,574,200 |
Balance, June 30, 2022 | | i 917,009 | | $ | i 9,168 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 26,729,124 | | $ | i 92,210,760 | | $ | i 10,989,907 | | $ | i 99,071,672 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | Non-controlling | | | | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Interest |
| Total | ||||||
NINE MONTHS ENDED JUNE 2021 | | | | | | | | | | | | | | | | | | | | | | |
Balance, October 1, 2020 | | i 869,867 | | $ | i 8,697 | | ( i 332,152) | | $ | ( i 30,861,549) | | $ | i 24,282,058 | | $ | i 71,362,334 | | $ | — | | $ | i 64,791,540 |
Dividends on common stock, $ i 5.54 per share | | — | | | — | | — | | | — | | | — | | | ( i 3,249,716) | | | — | | | ( i 3,249,716) |
Compensation expense and settlement of equity-based awards | | i 13,722 | | | i 137 | | — | | | — | | | i 661,234 | | | — | | | — | | | i 661,371 |
Repurchase of common stock | | — | | | — | | ( i 68) | | | ( i 5,738) | | | — | | | — | | | — | | | ( i 5,738) |
Net income | | — | |
| — | | — | | | — | | | — | | | i 9,197,728 | | | — | | | i 9,197,728 |
Balance, June 30, 2021 | | i 883,589 | | $ | i 8,834 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 24,943,292 | | $ | i 77,310,346 | | $ | — | | $ | i 71,395,185 |
| | | | | | | | | | | | | | | | | | | | | | |
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 |
Fair value measurement of non-controlling interest | | — | | | — | | — | | | — | | | — | | | — | | | i 10,419,138 | | | i 10,419,138 |
Distributions | | — | | | — | | — | | | — | | | — | | | — | | | ( i 20,600) | | | ( i 20,600) |
Net income | | — | |
| — | | — | | | — | | | — | | | i 11,990,068 | | | i 591,369 | | | i 12,581,437 |
Balance, June 30, 2022 | | i 917,009 | | $ | i 9,168 | | ( i 332,220) | | $ | ( i 30,867,287) | | $ | i 26,729,124 | | $ | i 92,210,760 | | $ | i 10,989,907 | | $ | i 99,071,672 |
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, 2022 and 2021
| | | | | | |
| | June | | June | ||
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | i 12,581,437 | | $ | i 9,197,728 |
Adjustments to reconcile net income to net cash flows from (used in) operating activities: | | | | | | |
Depreciation | | | i 2,486,613 | | | i 2,295,390 |
Amortization | | | i 28,355 | | | — |
Equity method investment earnings, net of tax | | | ( i 1,670,133) | | | ( i 1,403,124) |
Gain on re-valuation of equity method investment to fair value | | | ( i 2,387,411) | | | — |
Gain on sales of property and equipment | | | ( i 133,639) | | | ( i 8,057) |
Equity-based compensation | | | i 1,903,884 | | | i 1,819,272 |
Deferred income taxes | | | i 1,407,012 | | | ( i 220,693) |
Provision for losses on doubtful accounts | | | i 83,000 | | | i 86,000 |
Inventory allowance | | | i 688,902 | | | i 238,148 |
Changes in assets and liabilities net of effects of business acquisition: | | | | | | |
Accounts receivable | | | ( i 1,215,238) | | | ( i 2,334,341) |
Inventories | | | ( i 4,674,292) | | | i 3,093,184 |
Prepaid and other current assets | | | ( i 2,986,167) | | | ( i 3,677,421) |
Equity method investment distributions | | | i 1,095,467 | | | i 828,466 |
Other assets | | | ( i 728,596) | | | i 34,647 |
Accounts payable | | | i 1,313,711 | | | i 2,680,540 |
Accrued expenses and accrued wages, salaries and bonuses | | | i 1,926,479 | | | i 804,983 |
Other long-term liabilities | | | ( i 690,693) | | | ( i 169,854) |
Income taxes payable and receivable | | | ( i 1,890,449) | | | ( i 537,548) |
Net cash flows from (used in) operating activities | | | i 7,138,242 | | | i 12,727,320 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Purchase of property and equipment | | | ( i 13,940,428) | | | ( i 1,254,958) |
Proceeds from sales of property and equipment | | | i 145,500 | | | i 39,728 |
Principal payment received on note receivable | | | i 175,000 | | | — |
Cash acquired in business acquisition | | | i 7,958 | | | — |
Net cash flows from (used in) investing activities | | | ( i 13,611,970) | | | ( i 1,215,230) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Borrowings under revolving credit facilities | | | i 1,393,048,057 | | | i 1,217,375,073 |
Repayments under revolving credit facilities | | | ( i 1,381,508,745) | | | ( i 1,227,854,771) |
Proceeds from borrowings on long-term debt | | | — | | | i 3,000,000 |
Principal payments on long-term debt | | | ( i 524,874) | | | ( i 373,216) |
Proceeds from exercise of stock options | | | i 173,590 | | | — |
Repurchase of common stock | | | — | | | ( i 5,738) |
Dividends on common stock | | | ( i 3,331,606) | | | ( i 3,249,716) |
Settlement and withholdings of equity-based awards | | | ( i 1,280,749) | | | ( i 365,022) |
Distributions to non-controlling interest | | | ( i 20,600) | | | — |
Net cash flows from (used in) financing activities | | | i 6,555,073 | | | ( i 11,473,390) |
Net change in cash | | | i 81,345 | | | i 38,700 |
Cash, beginning of period | | | i 519,591 | | | i 661,195 |
Cash, end of period | | $ | i 600,936 | | $ | i 699,895 |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid during the period for interest | | $ | i 1,201,073 | | $ | i 1,031,457 |
Cash paid during the period for income taxes | |
| i 5,468,488 | |
| i 3,667,036 |
| | | | | | |
Supplemental disclosure of non-cash information: | | | | | | |
Equipment acquisitions classified in accounts payable | | $ | i 123,801 | | $ | — |
Effect of business acquisition (see Note 2) | | | i 23,308,624 | | | — |
Issuance of common stock in connection with the vesting and exercise of | |
| i 2,280,783 | |
| i 949,812 |
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 29 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 nineteen 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 5,300 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over i 20,600 different consumer products, including cigarettes and tobacco products, candy and other confectionery, 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 2021, 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 distributing 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 seven distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia. These distribution centers, combined with cross-dock facilities, include approximately i 885,000 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.
RETAIL SEGMENT
Our Retail Segment, through our Healthy Edge, Inc. 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 U.S. 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 i nineteen retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akin’s”), and Earth Origins Market (“EOM”). 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.
/
/7
FINANCIAL 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. To the extent a subsidiary is not wholly owned, any related non-controlling interests are included as a separate component of shareholders’ equity. 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, 2021, 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 subsidiaries. Additionally, the three month fiscal periods ended June 30, 2022 and June 30, 2021 have been referred to throughout this quarterly report as Q3 2022 and Q3 2021, respectively. The fiscal balance sheet dates as of June 30, 2022 and September 30, 2021 have been referred to as June 2022 and September 2021, 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
The Company and Chas. M. Sledd Company (“Sledd”), a West Virginia wholesale distributor serving the convenience store industry, jointly own and operate Team Sledd, LLC (“Team Sledd”), a limited liability company which owns and operates Sledd’s wholesale distribution business.
Pursuant to an operating agreement between the Company and Sledd, certain membership interests in Team Sledd may be redeemed over a period of years, with such redemptions being funded from the operations of Team Sledd. Any such redemptions would result in a corresponding increase in AMCON’s ownership percentage in Team Sledd. In May 2022 (the “Control Date”), Team Sledd redeemed additional membership interests from certain members. Prior to May 2022, the Company had a minority interest in Team Sledd, which had been accounted for under the equity method. As a result of the May 2022 redemption, the Company became the majority owner of Team Sledd with a controlling interest of approximately i 56%. The Company provided no additional consideration to acquire control of Team Sledd. The costs incurred to effectuate the acquisition were not significant and were expensed as incurred. The acquisition expands the Company’s footprint and enhances our ability to service customers in the Mid-Atlantic region of the United States.
The transaction has been accounted for in accordance with Accounting Standards Codification (“ASC”) 805 – Business Combinations and the Company has measured the fair value of its previously held equity interest and the related non-controlling interest using the discounted cash flow methodology with the assistance of independent valuation consultants. The preliminary total fair value of Team Sledd was approximately $ i 23.3 million, which resulted in a gain of approximately $ i 2.4 million related to the fair value remeasurement of the Company’s ownership interest in Team Sledd. The gain was recorded as a component of other income in the Company’s Condensed Consolidated Unaudited Statement of Operations for Q3 2022. In connection with the transaction, the Company recorded a deferred tax liability of approximately $ i 0.6
/8
million which will be recognized in future periods when the associated taxes become due. Inputs used to measure the acquisition-date fair value of the Company’s previously held equity interest and the related non-controlling interest in the entity included sales growth, gross profit estimates, economic and industry conditions, working capital requirements and the contractual requirements of the operating agreement. Team Sledd is being reported as a component of the Company’s Wholesale Segment.
The following tables summarize the acquisition-date fair value of Team Sledd, the preliminary fair value of Team Sledd’s assets and liabilities at the Control Date, and the resulting goodwill. The fair values are based on preliminary estimates and are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date).
i
| | | |
Acquisition-date fair value of non-controlling interest |
| $ | i 10,419,138 |
Acquisition-date fair value of previously held interest | | | i 12,897,444 |
Fair value of Team Sledd at the Control Date | | $ | i 23,316,582 |
| | | |
Preliminary amounts of identifiable assets and liabilities at fair value: | | | |
| | | |
Cash | | $ | i 7,958 |
Accounts receivable | | | i 29,524,181 |
Inventories | | | i 42,896,135 |
Prepaid and other current assets | | | i 2,533,205 |
Property and equipment | | | i 21,002,604 |
Operating lease right-of use assets | | | i 1,501,996 |
Other intangible assets | | | i 1,664,000 |
Other assets | | | i 1,685,945 |
Liabilities assumed | | | ( i 78,340,442) |
Total identifiable net assets | | $ | i 22,475,582 |
| | | |
Goodwill | | | i 841,000 |
| | $ | i 23,316,582 |
Accounts receivable were recorded at their fair value representing the amount we expect to collect. Gross contractual amounts receivable were approximately $ i 1.7 million more than their acquisition-date fair value.
Goodwill totaling approximately $ i 0.8 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 deductible for tax purposes.
Other intangible assets acquired consisted of the following:
i
| | | | | | |
|
| Acquisition-Date | | | Useful Life | |
Other Intangible Asset |
| Fair Value |
|
| (Years) | |
Customer list | | $ | i 1,442,000 | | | i 15 |
Non-competition agreement | | | i 222,000 | | | i 3 |
| | $ | i 1,664,000 | | | |
i3. INVENTORIES
Inventories in our wholesale segment consisted of finished goods and are stated at the lower of cost or net realizable value, determined on a FIFO basis. 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 1.5 million at June 2022 and $ i 0.8 million at September 2021. 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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9
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at June 2022 and September 2021 was as follows:
i
| | | | | | |
|
| June |
| September | ||
Wholesale Segment |
| 2022 |
| 2021 | ||
Beginning Balance | | $ | i 4,436,950 | | $ | i 4,436,950 |
Acquisition of Team Sledd, LLC | |
| i 841,000 | |
| — |
Ending Balance | | $ | i 5,277,950 | | $ | i 4,436,950 |
Other intangible assets at June 2022 and September 2021 consisted of the following:
i
| | | | | | |
|
| June |
| September | ||
|
| 2022 |
| 2021 | ||
Customer list (Wholesale Segment) | | $ | i 1,425,978 | | $ | — |
Non-competition agreement (Wholesale Segment) | | | i 209,667 | | | — |
Trademarks and tradenames (Retail Segment) | | | i 500,000 | | | i 500,000 |
| | $ | i 2,135,645 | | $ | i 500,000 |
Goodwill, trademarks and tradenames 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 sheet represents amounts allocated to its wholesale reporting unit which totaled approximately $ i 5.3 million and $ i 4.4 million at June 2022 and September 2021, 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 2021.
At June 2022, identifiable intangible assets considered to have finite lives were represented by a customer list which is being amortized over i fifteen years and a non-competition agreement which is being amortized over i three years. These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted. Amortization expense related to these assets was less than $ i i 0.1 / million for both the three and nine month periods ended June 2022.
iEstimated future amortization expense related to identifiable intangible assets with finite lives was as follows at June 2022:
| | | |
| | June | |
|
| 2022 | |
Fiscal 2022 (1) | | $ | i 42,533 |
Fiscal 2023 | | | i 170,130 |
Fiscal 2024 | | | i 170,130 |
Fiscal 2025 | | | i 139,303 |
Fiscal 2026 and thereafter | | | i 1,113,549 |
| | $ | i 1,635,645 |
| (1) | Represents amortization for the remaining three months of Fiscal 2022. |
i5. DIVIDENDS
The Company paid cash dividends on its common stock totaling $ i 0.1 million and $ i 3.3 million for the three and nine month periods ended June 2022, respectively, and $ i 0.1 million and $ i 3.2 million for the three and nine month periods ended June 2021, respectively.
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6. 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 | ||||||||||
| | 2022 | | 2021 | ||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Weighted average number of common shares outstanding | | | i 569,689 | | | i 569,689 | | | i 551,369 | | | i 551,369 |
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | | | — | | | i 12,681 | | | — | | | i 18,112 |
Weighted average number of shares outstanding | | | i 569,689 | | | i 582,370 | | | i 551,369 | | | i 569,481 |
Net income available to common shareholders | | $ | i 5,982,831 | | $ | i 5,982,831 | | $ | i 3,691,210 | | $ | i 3,691,210 |
| | | | | | | | | | | | |
Net earnings per share available to common shareholders | | $ | i 10.50 | | $ | i 10.27 | | $ | i 6.69 | | $ | i 6.48 |
| (1) | Diluted earnings per share calculation includes all equity-based awards deemed to be dilutive. |
| | | | | | | | | | | | |
| | For the nine months ended June | ||||||||||
| | 2022 | | 2021 | ||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Weighted average number of common shares outstanding | | | i 567,026 | | | i 567,026 | | | i 550,276 | | | i 550,276 |
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | | | — | | | i 14,552 | | | — | | | i 11,664 |
Weighted average number of shares outstanding | | | i 567,026 | | | i 581,578 | | | i 550,276 | | | i 561,940 |
Net income available to common shareholders | | $ | i 11,990,068 | | $ | i 11,990,068 | | $ | i 9,197,728 | | $ | i 9,197,728 |
| | | | | | | | | | | | |
Net earnings per share available to common shareholders | | $ | i 21.15 | | $ | i 20.62 | | $ | i 16.71 | | $ | i 16.37 |
| (1) | Diluted earnings per share calculation includes all equity-based awards deemed to be dilutive. |
i7. DEBT
The Company primarily finances its operations through i two credit facility agreements (the “AMCON Facility” and the “Team Sledd Facility”, and together “the Facilities”) and long-term debt agreements with banks. In Q3 2022, the Company amended the AMCON Facility, increasing its aggregate borrowing capacity from $ i 110.0 million to $ i 150.0 million, extending the maturity date from March 2025 to June 2027, and adding certain real estate properties as eligible borrowing collateral under the credit agreement.
At June 2022, the Facilities have a total combined borrowing capacity of $ i 250.0 million, which includes 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 Team Sledd Facility matures in March 2027 and the AMCON Facility matures in June 2027, 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 in the case of the AMCON Facility, certain of the Company’s real estate. The Facilities each feature an unused commitment fee and financial covenants including fixed charge coverage ratios. Borrowings under the Facilities bear interest at either the bank’s prime rate, the Secured Overnight Financing Rate (“SOFR”) or the London Interbank Offered Rate (“LIBOR”), plus any applicable spreads.
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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 2022 was $ i 194.4 million, of which $ i 101.2 million was outstanding, leaving $ i 93.2 million available.
The average interest rate of the Facilities was i 3.23% at June 2022. For the nine months ended June 2022, the peak borrowings under the Facilities was $ i 123.5 million, and the average borrowings and average availability under the Facilities was $ i 51.2 million and $ i 60.7 million, respectively.
LONG-TERM DEBT
In addition to the Facilities, the Company also had the following long-term obligations at June 2022 and September 2021.
i
| | | | | | |
|
| June 2022 |
| September 2021 | ||
Real Estate Loan, interest payable at a fixed rate of i i 3.625 / % with monthly installments of principal and interest of $ i i 47,399 / through February 2025 with remaining principal due March 2025, collateralized by i i three / distribution facilities | | $ | i 4,190,214 | | $ | i 4,498,213 |
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 1,006,381 | | | i 1,117,254 |
Note payable, interest payable at a fixed rate of i 4.10% with monthly installments of principal and interest of $ i 53,361 through June 2033 with remaining principal due July 2033, collateralized by Team Sledd’s principal office and warehouse | | | i 5,674,355 | | | — |
Note payable, interest payable at a fixed rate of i 3.25% with monthly installments of principal and interest of $ i 17,016 through August 2034 with remaining principal due September 2034, collateralized by Team Sledd’s principal office and warehouse | | | i 2,086,721 | | | — |
Note payable with monthly installments of principal and interest of $ i 7,934 through February 2025 with remaining principal due March 2025, and an effective variable rate of i 2.90% at June 2022, collateralized by certain of Team Sledd’s equipment | |
| i 406,572 | |
| — |
| |
| i 13,364,243 | |
| i 5,615,467 |
Less current maturities | |
| ( i 1,204,348) | |
| ( i 561,202) |
| | $ | i 12,159,895 | | $ | i 5,054,265 |
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 |
| | |
2022 (1) | | $ | i 302,592 |
2023 | | | i 2,050,814 |
2024 | | | i 1,120,121 |
2025 | |
| i 4,011,184 |
2026 and thereafter | |
| i 5,879,532 |
| | $ | i 13,364,243 |
| (1) | Represents payments for the remaining three months of Fiscal 2022. |
Cross Default and Co-Terminus Provisions
The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term loan (the “Real Estate Loan”) with BMO Harris Bank N.A. (“BMO”) which is also a participant lender on the AMCON Facility. The Real Estate Loan contains cross default provisions which would cause the loan to be considered in default if the loans where BMO is a lender, including the AMCON Facility, were in default. There were i no such cross defaults at June 2022. In addition, the Real Estate Loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms. As discussed in Note 12, the Real Estate
12
Loan was subsequently terminated and repaid in connection with the Company entering into the amendment to the AMCON Facility during Q3 2022.
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 2022.
The Company was in compliance with all of its financial covenants under the Facilities at June 2022.
Other
The Company has issued a letter of credit for $ i 0.6 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.
i8. INCOME TAXES
The Company’s effective income tax rate increased during the three and nine month periods ended June 2022 as compared to the respective prior year periods, primarily due to higher non-deductible compensation during the current year periods, resulting in effective income tax rates in excess of statutory rates.
i9. SUPPLEMENTAL PRO FORMA INFORMATION
Prior to May 2022, the Company held a minority interest in Team Sledd, and accounted for its ownership interest as an equity method investment. At the Control Date in May 2022, the Company’s equity method investment in Team Sledd became a controlling interest with the Company holding an equity interest in Team Sledd of approximately i 56% at June 2022.
Team Sledd’s summarized unaudited financial data prior to the Control Date for the three and nine months ended June 2022 and June 2021 was as follows:
i
| | | | | | | | | | | | |
|
| For the |
| For the |
| For the |
| For the | ||||
Sales | | $ | i 64,123,105 | | $ | i 179,676,748 | | $ | i 393,606,372 | | $ | i 502,704,216 |
Gross profit | | | i 3,721,966 | | | i 9,711,966 | | | i 21,759,753 | | | i 25,279,274 |
Net income before income taxes | | | i 828,775 | | | i 2,034,258 | | | i 4,498,190 | | | i 3,979,078 |
Net income attributable to AMCON, net of tax | | | i 307,973 | | | i 754,293 | | | i 1,670,133 | | | i 1,403,124 |
The following table presents unaudited supplemental pro forma information for Team Sledd from the Control Date through June 2022, which is included in the Company’s consolidated results for the three and nine months ended June 2022.
i
| | | |
Revenue |
| $ | i 108,674,587 |
Net income available to common shareholders | | $ | i 1,340,811 |
The following table presents unaudited supplemental pro forma information assuming the Company acquired a i 56% interest in Team Sledd on October 1, 2020. These pro forma amounts do not purport to be indicative of the actual results that would have been obtained had the acquisition occurred at that time.
| | | | | | | | | | | | |
|
| For the three months ended June 2022 |
| For the three months ended June 2021 |
| For the nine months ended June 2022 |
| For the nine months ended June 2021 | ||||
Revenue | | $ | i 614,707,257 | | $ | i 617,672,972 | | $ | i 1,758,649,994 | | $ | i 1,724,275,510 |
Net income available to common shareholders | | $ | i 6,022,099 | | $ | i 3,789,960 | | $ | i 12,205,185 | | $ | i 9,462,698 |
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13
10. BUSINESS SEGMENTS
The Company has i two reportable business segments: the wholesale distribution of consumer products which includes Team Sledd, and the retail sale of health and natural food products. 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) before taxes.
i
| | | | | | | | | | | | |
| | 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 320,103 | | | — | | | i 335,708 | | | i 655,811 |
Income (loss) from operations before taxes | | | i 9,094,511 | | | i 256,392 | | | ( i 687,676) | | | i 8,663,227 |
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 |
| | | | | | | | | | | | |
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
THREE MONTHS ENDED JUNE 2021 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | i 294,690,427 | | $ | — | | $ | — | | $ | i 294,690,427 |
Tobacco | | | i 68,525,147 | | | — | | | — | | | i 68,525,147 |
Confectionery | | | i 25,703,325 | | | — | | | — | | | i 25,703,325 |
Health food | | | — | | | i 11,745,769 | | | — | | | i 11,745,769 |
Foodservice & other | | | i 37,648,362 | | | — | | | — | | | i 37,648,362 |
Total external revenue | | | i 426,567,261 | | | i 11,745,769 | | | — | | | i 438,313,030 |
Depreciation | | | i 445,831 | | | i 295,349 | | | — | | | i 741,180 |
Operating income (loss) | | | i 6,349,783 | | | i 621,421 | | | ( i 2,671,795) | | | i 4,299,409 |
Interest expense | | | i 56,924 | | | — | | | i 273,005 | | | i 329,929 |
Income (loss) from operations before taxes | | | i 6,304,328 | | | i 624,447 | | | ( i 2,915,858) | | | i 4,012,917 |
Equity method investment earnings, net of tax | | | — | | | — | | | i 754,293 | | | i 754,293 |
Total assets | | | i 159,766,283 | | | i 17,140,050 | | | i 11,874,597 | | | i 188,780,930 |
Capital expenditures | | | i 384,429 | | | i 133,732 | | | — | | | i 518,161 |
/ /14
| | | | | | | | | | | | |
| | 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 428,665 | | | — | | | i 794,164 | | | i 1,222,829 |
Income (loss) from operations before taxes | | | i 22,767,606 | | | i 1,469,705 | | | ( i 8,339,007) | | | i 15,898,304 |
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 |
| | | | | | | | | | | | |
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
NINE MONTHS ENDED JUNE 2021 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | i 826,838,177 | | $ | — | | $ | — | | $ | i 826,838,177 |
Tobacco | | | i 194,802,459 | | | — | | | — | | | i 194,802,459 |
Confectionery | | | i 65,769,418 | | | — | | | — | | | i 65,769,418 |
Health food | | | — | | | i 35,199,199 | | | — | | | i 35,199,199 |
Foodservice & other | | | i 98,962,041 | | | — | | | — | | | i 98,962,041 |
Total external revenue | | | i 1,186,372,095 | | | i 35,199,199 | | | — | | | i 1,221,571,294 |
Depreciation | | | i 1,405,528 | | | i 889,862 | | | — | | | i 2,295,390 |
Operating income (loss) | | | i 16,569,154 | | | i 1,167,737 | | | ( i 6,178,910) | | | i 11,557,981 |
Interest expense | | | i 144,569 | | | — | | | i 872,333 | | | i 1,016,902 |
Income (loss) from operations before taxes | | | i 16,499,529 | | | i 1,176,481 | | | ( i 6,965,406) | | | i 10,710,604 |
Equity method investment earnings, net of tax | | | — | | | — | | | i 1,403,124 | | | i 1,403,124 |
Total assets | | | i 159,766,283 | | | i 17,140,050 | | | i 11,874,597 | | | i 188,780,930 |
Capital expenditures | | | i 977,860 | | | i 277,098 | | | — | | | i 1,254,958 |
i11. COMMON STOCK REPURCHASES
The Company did i i no / t repurchase any shares of its common stock during the three and nine months ended June 2022. The Company did i not repurchase any shares of its common stock during the three months ended June 2021, and repurchased i 68 shares of its common stock during the nine months ended June 2021 for cash totaling less than $ i 0.1 million. All repurchased shares were recorded in treasury stock at cost.
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i12. SUBSEQUENT EVENT
On July 1, 2022, in connection with an amendment to the AMCON Facility during Q3 2022, the Company’s existing Real Estate Loan with BMO described in Note 7 was terminated and the $ i 4.2 million remaining principal was paid in full. The Company’s real properties that were subject to the terminated agreement are now collateral under the AMCON Facility.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS UPDATE AND IMPACT OF COVID-19
Our businesses continue to be impacted by a number of macro-economic factors including the trailing impact of the COVID-19 pandemic and continuing challenges relating to global supply chains and product 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, and interest costs have all increased.
Since the onset of the COVID-19 pandemic, both of our business segments have experienced an increase in demand and sales across a broad range of product categories. It remains unclear, however, if these demand trends will remain intact or if they will revert back to more historical levels over time, particularly as inflation begins to impact consumer discretionary spending.
Finally, we continue to closely monitor proposals from governmental and regulatory bodies including the United States Food and Drug Administration (“FDA”) which are evaluating the prohibition and/or limitations on the sale of certain cigarette (menthol flavored) tobacco and e-cigarette/vaping products. If such regulations were to be implemented, they would have a negative impact on the Company’s financial results.
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 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 e-cigarette/vaping products 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, |
| ● | 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 since the onset of the COVID-19 pandemic has experienced both higher sales volumes and labor costs, and the related risk of sales returning to more historical levels without the Company being able to offset increases in its cost structure, |
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| ● | risks associated with the acquisition of assets or new businesses or investments in equity investees by either of our business segments including, but not limited to, risks associated with purchase price and business valuation risks, vendor and customer retention risks, employee and technology integration risks, and risks related to the assumption of certain liabilities or obligations, |
| ● | 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, |
| ● | 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 including security breaches, cyber-attacks, malware, or other methods by which our information systems could be compromised, |
| ● | 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 e-cigarette/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 its potential impact on discretionary consumer spending, |
| ● | decreased availability of capital resources, |
| ● | 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, and domestic or political unrest, or any restrictions, regulations, or security measures implemented by governmental bodies in response to these items, |
| ● | other risks over which the Company has little or no control, and any other factors not identified herein. |
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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, 2021, as filed with the Securities and Exchange Commission. Other than the critical accounting estimate below, there have been no significant changes with respect to these estimates and related policies during the nine months ended June 2022.
BUSINESS COMBINATIONS
Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. Determining fair value of identifiable assets acquired, particularly intangibles, and liabilities assumed also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
THIRD FISCAL QUARTER 2022 (Q3 2022)
The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2022 and June 2021:
Wholesale Segment
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 5,300 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 20,600 different consumer products, including cigarettes and tobacco products, candy and other confectionery, 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 2021, 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 distributing 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 seven distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia. These distribution centers, combined with cross-dock facilities, include approximately 885,000 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.
Retail Segment
Our Retail Segment, through our Healthy Edge, Inc. 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
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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 U.S. 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 nineteen retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akin’s”), and Earth Origins Market (“EOM”). 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:
| | | | | | | | | | | |
|
| 2022 |
| 2021 |
| Incr (Decr) |
| % Change | |||
CONSOLIDATED: | | | | | | | | | | | |
Sales (1) | | $ | 550,584,152 | | $ | 438,313,030 | | $ | 112,271,122 |
| 25.6 |
Cost of sales | |
| 516,907,540 | |
| 412,771,324 | |
| 104,136,216 |
| 25.2 |
Gross profit | |
| 33,676,612 | |
| 25,541,706 | |
| 8,134,906 |
| 31.8 |
Gross profit percentage | |
| 6.1 | % |
| 5.8 | % |
| | | |
| | | | | | | | | | | |
Operating expense | | $ | 26,774,826 | | $ | 21,242,297 | | $ | 5,532,529 |
| 26.0 |
Operating income | |
| 6,901,786 | |
| 4,299,409 | |
| 2,602,377 |
| 60.5 |
Interest expense | |
| 655,811 | |
| 329,929 | |
| 325,882 |
| 98.8 |
Income tax expense | |
| 2,397,000 | |
| 1,076,000 | |
| 1,321,000 |
| 122.8 |
Equity method investment earnings, | | | 307,973 | | | 754,293 | | | (446,320) | | (59.2) |
Net income available to common shareholders | |
| 5,982,831 | |
| 3,691,210 | |
| 2,291,621 |
| 62.1 |
| | | | | | | | | | | |
BUSINESS SEGMENTS: | | | | | | | | | | | |
Wholesale | | | | | | | | | | | |
Sales | | $ | 539,233,355 | | $ | 426,567,261 | | $ | 112,666,094 |
| 26.4 |
Gross profit | |
| 29,442,578 | |
| 21,157,711 | |
| 8,284,867 |
| 39.2 |
Gross profit percentage | |
| 5.5 | % |
| 5.0 | % |
| | | |
Retail | | | | | | | | | | | |
Sales | | $ | 11,350,797 | | $ | 11,745,769 | | $ | (394,972) |
| (3.4) |
Gross profit | |
| 4,234,034 | |
| 4,383,995 | |
| (149,961) |
| (3.4) |
Gross profit percentage | |
| 37.3 | % |
| 37.3 | % |
| | | |
| (1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $9.0 million in Q3 2022 and $8.3 million in Q3 2021. |
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SALES
Changes in sales are driven by two primary components:
| (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; and |
| (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. |
SALES – Q3 2022 vs. Q3 2021
Sales in our Wholesale Segment increased $112.7 million during Q3 2022 as compared to Q3 2021. Significant items impacting sales during Q3 2022 included a $108.7 million increase in sales related to the acquisition of Team Sledd, LLC (“Team Sledd”), a $20.5 million increase in sales related to price increases implemented by cigarette manufacturers, and a $9.9 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), partially offset by a $26.4 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment decreased $0.4 million during Q3 2022 as compared to Q3 2021. This decrease was due to approximately $0.1 million related to lower sales volumes in our existing stores and approximately $0.3 million related to the closure of a store in our Florida market during the current year period.
GROSS PROFIT – Q3 2022 vs. Q3 2021
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 $8.3 million during Q3 2022 as compared to Q3 2021. Significant items impacting gross profit during Q3 2022 included a $5.8 million increase in gross profit related to the acquisition of Team Sledd, a $2.2 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.6 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods, partially offset by a $0.3 million decrease in gross profit related to net impact of cigarette manufacturer promotions and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment decreased $0.1 million during Q3 2022 as compared to Q3 2021. This decrease was primarily related to the closure of a store in our Florida market during the current year period.
OPERATING EXPENSE – Q3 2022 vs. Q3 2021
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 2022 operating expenses increased $5.5 million as compared to Q3 2021. Significant items impacting operating expenses during Q3 2022 included a $4.1 million increase in operating expenses related to the acquisition of Team Sledd, a $1.1 million increase in employee compensation and benefit costs largely due to a highly competitive labor market which has increased wage levels across all functional areas of the Company. In addition, the Company experienced a $0.6 million increase in fuel costs primarily related to higher diesel fuel prices, and a $0.2 million increase in operating expenses in our Retail Segment. These higher operating costs were partially offset by a $0.4 million decrease in health and other insurance costs, and a $0.1 million decrease in other Wholesale Segment operating expenses.
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INCOME TAX EXPENSE – Q3 2022 vs. Q3 2021
The Company’s effective income tax rate increased during the three month period ended June 2022 as compared to the respective prior year period, primarily due to higher non-deductible compensation during the current year period, resulting in effective income tax rates in excess of statutory rates.
RESULTS OF OPERATIONS – NINE MONTHS ENDED JUNE:
| | | | | | | | | | | |
|
| 2022 |
| 2021 |
| Incr (Decr) |
| % Change | |||
CONSOLIDATED: | | | | | | | | | | | |
Sales (1) | | $ | 1,365,043,621 | | $ | 1,221,571,294 | | $ | 143,472,327 |
| 11.7 |
Cost of sales | | | 1,277,757,425 | | | 1,149,594,823 | | | 128,162,602 |
| 11.1 |
Gross profit | | | 87,286,196 | | | 71,976,471 | | | 15,309,725 |
| 21.3 |
Gross profit percentage | | | 6.4 | % | | 5.9 | % | | | | |
| | | | | | | | | | | |
Operating expense | | $ | 72,683,383 | | $ | 60,418,490 | | $ | 12,264,893 |
| 20.3 |
Operating income | | | 14,602,813 | | | 11,557,981 | | | 3,044,832 |
| 26.3 |
Interest expense | | | 1,222,829 | | | 1,016,902 | | | 205,927 |
| 20.3 |
Income tax expense | | | 4,987,000 | | | 2,916,000 | | | 2,071,000 |
| 71.0 |
Equity method investment earnings, | | | 1,670,133 | | | 1,403,124 | | | 267,009 |
| 19.0 |
Net income available to common shareholders | | | 11,990,068 | | | 9,197,728 | | | 2,792,340 |
| 30.4 |
| | | | | | | | | | | |
BUSINESS SEGMENTS: | | | | | | | | | | | |
Wholesale | | | | | | | | | | | |
Sales | | $ | 1,329,348,323 | | $ | 1,186,372,095 | | $ | 142,976,228 |
| 12.1 |
Gross profit | | | 73,761,372 | | | 58,804,594 | | | 14,956,778 |
| 25.4 |
Gross profit percentage | | | 5.5 | % | | 5.0 | % | | | | |
Retail | | | | | | | | | | | |
Sales | | $ | 35,695,298 | | $ | 35,199,199 | | $ | 496,099 |
| 1.4 |
Gross profit | |
| 13,524,824 | |
| 13,171,877 | |
| 352,947 |
| 2.7 |
Gross profit percentage | |
| 37.9 | % |
| 37.4 | % | | | | |
| (1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $24.2 million for the nine months ended June 2022 and $22.4 million for the nine months ended June 2021. |
SALES – Nine months ended June 2022
Sales in our Wholesale Segment increased $143.0 million for the nine months ended June 2022 as compared to the same prior year period. Significant items impacting sales during the period included a $108.7 million increase in sales related to the acquisition of Team Sledd, a $56.1 million increase in sales related to price increases implemented by cigarette manufacturers and a $36.6 million increase in sales related to higher sales volumes in our Other Products category, partially offset by a $58.4 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.5 million for the nine months ended June 2022 as compared to the same prior year period. Of this increase, approximately $1.5 million related to higher sales volumes in our existing stores, partially offset by a $0.6 million decrease in sales volume related to the closure of a non-performing store in our Florida market during the comparative prior year period, and a $0.3 million decrease in sales volume related to the closure of a store in our Florida market during the current year period. Sales in both of our business segments continue to benefit from high consumer demand across a range of product categories.
GROSS PROFIT – Nine months ended June 2022
Gross profit in our Wholesale Segment increased $15.0 million for the nine months ended June 2022 as compared to the same prior year period. Significant items impacting gross profit during the period included a $5.8 million increase in gross profit related to the acquisition of Team Sledd, a $8.6 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.4 million increase in gross profit due to the timing and related benefits of
21
cigarette manufacturer price increases between the comparative periods, and a $0.2 million increase in gross profit related to the net impact of cigarette manufacturer promotions and gross margin enhancement, and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment increased $0.4 million for the nine months ended June 2022 as compared to the same prior year period. This change was due to a $0.7 million increase in gross margin in our existing stores which have benefited from higher sales volume and improved product mix, partially offset by a $0.2 million decrease related to the closure of a non-performing store in our Florida market during the comparative prior year period, and a $0.1 million decrease related to the closure of a store in our Florida market during the current year period.
OPERATING EXPENSE – Nine months ended June 2022
Operating expenses increased $12.3 million during the nine months ended June 2022 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $4.1 million increase in operating expenses related the acquisition of Team Sledd and a $5.6 million increase in employee compensation and benefit costs largely due to a highly competitive labor market which has increased wage levels across all functional areas of the Company. In addition, the Company experienced a $1.5 million increase in fuel costs primarily related to higher diesel fuel prices, a $0.5 million increase in health and other insurance costs, a $0.5 million increase in other Wholesale Segment operating expenses, and a $0.1 million increase in our Retail Segment operating expenses.
INCOME TAX EXPENSE – Nine months ended June 2022
The Company’s effective income tax rate increased during the nine month period ended June 2022 as compared to the respective prior year period, primarily due to higher non-deductible compensation during the current year period, resulting in effective income tax rates in excess of statutory rates.
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 which 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 two credit facility agreements (the “AMCON Facility” and the “Team Sledd Facility”, and together “the Facilities”) and long-term debt agreements with banks. In Q3 2022, the Company amended the AMCON Facility, increasing its aggregate borrowing capacity from $110.0 million to $150.0 million, extending the maturity date from March 2025 to June 2027, and adding certain real estate properties as eligible borrowing collateral under the credit agreement.
At June 2022, the Facilities have a total combined borrowing capacity of $250.0 million, which includes 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 Team Sledd Facility matures in March 2027 and the AMCON Facility matures in June 2027, 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 in the case of the AMCON Facility, certain of the Company’s real estate. The Facilities each feature an unused commitment fee and financial covenants including fixed charge coverage ratios. Borrowings under the Facilities bear interest at either the bank’s prime rate, the Secured Overnight Financing Rate (“SOFR”) or the London Interbank Offered Rate (“LIBOR”), 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 2022 was $194.4 million, of which $101.2 million was outstanding, leaving $93.2 million available.
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The average interest rate of the Facilities was 3.23% at June 2022. For the nine months ended June 2022, the peak borrowings under the Facilities was $123.5 million, and the average borrowings and average availability under the Facilities was $51.2 million and $60.7 million, respectively.
Cross Default and Co-Terminus Provisions
The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term loan (the “Real Estate Loan”) with BMO Harris Bank N.A. (“BMO”) which is also a participant lender on the AMCON Facility. The Real Estate Loan contains cross default provisions which would cause the loan to be considered in default if the loans where BMO is a lender, including the AMCON Facility, were in default. There were no such cross defaults at June 2022. In addition, the Real Estate Loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms. The Real Estate Loan was subsequently terminated and repaid in connection with the Company entering into the amendment to the AMCON Facility during Q3 2022.
Team Sledd’s three notes payable and the Team Sledd Facility contain cross default provisions. There were no such cross defaults at June 2022.
The Company was in compliance with all of its financial covenants under the Facilities at June 2022.
Dividend Payments
The Company paid cash dividends on its common stock totaling $0.1 million and $3.3 million for the three and nine month periods ended June 30, 2022, respectively, and $0.1 million and $3.2 million for the three and nine month periods ended June 30, 2021, respectively.
Other
The Company has issued a letter of credit for $0.6 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.
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.
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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, 2022 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 also is 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.
Other
As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.
Changes in Internal Control Over Financial Reporting
Other than controls implemented to address the consolidation of our majority interest in Team Sledd, LLC, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 2022, 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, 2021.
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
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| 10.1 | |
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| 10.2 | |
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| 10.3 | |
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| 10.4 | |
| | |
| 10.5 | |
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| 31.1 | |
| | |
| 31.2 | |
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| 32.1 | |
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| 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, 2022 | |
| |
| Chief Executive Officer and Chairman |
| |
Date: July 18, 2022 | |
| |
| Vice President, Chief Financial Officer and Secretary |
| (Principal Financial and Accounting Officer) |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 12/15/22 | ||||
| Filed on: | 7/18/22 | |||
| 7/15/22 | ||||
| 7/1/22 | ||||
| For Period end: | 6/30/22 | 8-K | ||
| 4/1/22 | ||||
| 10/1/21 | ||||
| 9/30/21 | 10-K | |||
| 6/30/21 | 10-Q | |||
| 4/1/21 | ||||
| 10/1/20 | ||||
| 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 11/23/22 Amcon Distributing Co. 10-K 9/30/22 92:9.7M Toppan Merrill Bridge/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 7/06/22 Amcon Distributing Co. 8-K:1,2,3,9 6/30/22 11:296K Toppan Merrill/FA |