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Amcon Distributing Co – ‘10-Q’ for 12/31/19

On:  Tuesday, 1/21/20, at 6:10am ET   ·   For:  12/31/19   ·   Accession #:  1558370-20-187   ·   File #:  1-15589

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 1/21/20  Amcon Distributing Co             10-Q       12/31/19   59:4.7M                                   Toppan Merrill Bridge/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    474K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     27K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     27K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     22K 
 5: EX-32.2     Certification -- §906 - SOA'02                      HTML     21K 
43: R1          Document and Entity Information                     HTML     45K 
24: R2          Condensed Consolidated Balance Sheets               HTML    107K 
31: R3          Condensed Consolidated Balance Sheets               HTML     33K 
                (Parenthetical)                                                  
59: R4          Condensed Consolidated Unaudited Statements of      HTML     73K 
                Operations                                                       
42: R5          Condensed Consolidated Unaudited Statements of      HTML     21K 
                Operations (Parenthetical)                                       
23: R6          Condensed Consolidated Unaudited Statements Of      HTML     55K 
                Shareholders? Equity                                             
30: R7          Condensed Consolidated Unaudited Statements Of      HTML     20K 
                Shareholders? Equity (Parenthetical)                             
58: R8          Condensed Consolidated Unaudited Statements of      HTML    116K 
                Cash Flows                                                       
44: R9          Summary of Significant Accounting Policies and      HTML     42K 
                Basis of Presentation                                            
38: R10         Inventories                                         HTML     21K 
53: R11         Leases                                              HTML    103K 
28: R12         Goodwill and Other Intangible Assets                HTML     40K 
21: R13         Dividends                                           HTML     20K 
39: R14         Earnings Per Share                                  HTML     58K 
54: R15         Debt                                                HTML     39K 
29: R16         Equity-Based Incentive Awards                       HTML     81K 
22: R17         Business Segments                                   HTML    162K 
37: R18         Common Stock Repurchase                             HTML     21K 
55: R19         Subsequent Event                                    HTML     22K 
34: R20         Summary of Significant Accounting Policies and      HTML     44K 
                Basis of Presentation (Policies)                                 
16: R21         Leases (Tables)                                     HTML    108K 
46: R22         Goodwill and Other Intangible Assets (Tables)       HTML     40K 
51: R23         Earnings Per Share (Tables)                         HTML     57K 
35: R24         Equity-Based Incentive Awards (Tables)              HTML     75K 
17: R25         Business Segments (Tables)                          HTML    162K 
47: R26         Summary of Significant Accounting Policies and      HTML     41K 
                Basis of Presentation (Details)                                  
52: R27         Summary of Significant Accounting Policies and      HTML     31K 
                Basis of Presentation - Accounting Pronouncements                
                (Details)                                                        
36: R28         Inventories (Details)                               HTML     22K 
15: R29         Leases (Details)                                    HTML     30K 
19: R30         Leases - Components of lease costs (Details)        HTML     28K 
27: R31         LEASES - Maturities of lease liabilities (Details)  HTML     37K 
57: R32         LEASES - Weighted-average remaining lease term and  HTML     23K 
                weighted-average discount rate (Details)                         
41: R33         LEASES - Other information (Details)                HTML     24K 
18: R34         LEASES - Future minimum operating lease payments    HTML     39K 
                (Details)                                                        
26: R35         GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill     HTML     23K 
                (Details)                                                        
56: R36         GOODWILL AND OTHER INTANGIBLE ASSETS - Other        HTML     22K 
                Intangible Assets (Details)                                      
40: R37         Dividends (Details)                                 HTML     20K 
20: R38         Earnings Per Share (Details)                        HTML     43K 
25: R39         Debt (Details)                                      HTML     75K 
14: R40         EQUITY-BASED INCENTIVE AWARDS - Omnibus Plans       HTML     29K 
                (Details)                                                        
33: R41         EQUITY-BASED INCENTIVE AWARDS - Authorized and      HTML     70K 
                Approved Restricted Stock Unit Awards (Details)                  
49: R42         EQUITY-BASED INCENTIVE AWARDS - Restricted Stock    HTML     49K 
                Unit Activity and All Equity-Based Awards                        
                (Details)                                                        
45: R43         Business Segments (Details)                         HTML     73K 
12: R44         Common Stock Repurchase (Details)                   HTML     25K 
32: R45         Subsequent Event (Details)                          HTML     26K 
48: XML         IDEA XML File -- Filing Summary                      XML    102K 
13: EXCEL       IDEA Workbook of Financial Reports                  XLSX     50K 
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50: ZIP         XBRL Zipped Folder -- 0001558370-20-000187-xbrl      Zip     96K 


‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Part I -- Financial Information
"Item 1. Financial Statements
"Condensed consolidated balance sheets at December 31, 2019 (unaudited) and September 30, 2019
"Condensed consolidated unaudited statements of operations for the three months ended December 31, 2019 and 2018
"Condensed consolidated unaudited statements of shareholders' equity for the three months ended December 31, 2019 and 2018
"Condensed consolidated unaudited statements of cash flows for the three months ended December 31, 2019 and 2018
"Notes to condensed consolidated unaudited financial statements
"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 3. Quantitative and Qualitative Disclosures About Market Risk
"Item 4. Controls and Procedures
"Part Ii -- Other Information
"Item 1. Legal Proceedings
"Item 1A. Risk Factors
"Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
"Item 3. Defaults Upon Senior Securities
"Item 4. Mine Safety Disclosures
"Item 6. Exhibits

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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December  31, 2019

OR

 

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 1-15589


amcon_4c_logo.eps

(Exact name of registrant as specified in its charter)

 

Delaware

    

47-0702918

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

 

 

7405 Irvington Road, Omaha NE

 

68122

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code: (402) 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

Common Stock, $0.01 Par Value

DIT

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.  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)  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐

 

Non-accelerated filer ☒

 

 

 

 

 

 

 

 

 

Smaller reporting company ☒Emerging growth company ☐

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 ☒

The Registrant had 565,833 shares of its $.01 par value common stock outstanding as of January 15, 2020.

 

 

 

Table of Contents

Form 10-Q

1st Quarter

 

INDEX

 

 

 

December 31, 2019

PAGE

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements: 

 

 

 

Condensed consolidated balance sheets at December 31, 2019 (unaudited) and September 30, 2019 

3

 

 

Condensed consolidated unaudited statements of operations for the three months ended December 31, 2019 and 2018 

4

 

 

Condensed consolidated unaudited statements of shareholders’ equity for the three months ended December 31, 2019 and 2018 

5

 

 

Condensed consolidated unaudited statements of cash flows for the three months ended December 31, 2019 and 2018 

6

 

 

Notes to condensed consolidated unaudited financial statements 

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

17

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

23

 

 

Item 4. Controls and Procedures 

24

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

25

 

 

Item 1A. Risk Factors 

25

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

25

 

 

Item 3. Defaults Upon Senior Securities 

25

 

 

Item 4. Mine Safety Disclosures 

25

 

 

Item 5. Other Information 

25

 

 

Item 6. Exhibits 

26

 

 

2

Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1.      Financial Statements  

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

December  31, 2019 and September 30, 2019

 

 

 

 

 

 

 

 

 

 

December

 

September

 

    

2019

    

2019

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

439,991

 

$

337,704

Accounts receivable, less allowance for doubtful accounts of $1.2 million at December 2019 and $0.9 million at September 2019

 

 

31,466,281

 

 

24,665,620

Inventories, net

 

 

62,958,790

 

 

102,343,517

Income taxes receivable

 

 

254,606

 

 

350,378

Prepaid and other current assets

 

 

8,464,551

 

 

7,148,459

Total current assets

 

 

103,584,219

 

 

134,845,678

 

 

 

 

 

 

 

Property and equipment, net

 

 

18,323,979

 

 

17,655,415

Operating lease right-of-use assets, net

 

 

20,523,782

 

 

 —

Goodwill

 

 

4,436,950

 

 

4,436,950

Other intangible assets, net

 

 

500,000

 

 

500,000

Other assets

 

 

231,527

 

 

273,579

Total assets

 

$

147,600,457

 

$

157,711,622

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

17,189,294

 

$

18,647,572

Accrued expenses

 

 

6,608,838

 

 

8,577,972

Accrued wages, salaries and bonuses

 

 

1,960,785

 

 

3,828,847

Current operating lease liabilities

 

 

5,460,582

 

 

 —

Current maturities of long-term debt

 

 

537,285

 

 

532,747

Total current liabilities

 

 

31,756,784

 

 

31,587,138

 

 

 

 

 

 

 

Credit facility

 

 

33,524,029

 

 

60,376,714

Deferred income tax liability, net

 

 

1,978,165

 

 

1,823,373

Long-term operating lease liabilities

 

 

15,397,681

 

 

 —

Long-term debt, less current maturities

 

 

2,989,526

 

 

3,125,644

Other long-term liabilities

 

 

 —

 

 

42,011

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, $.01 par value, 1,000,000 shares authorized

 

 

 —

 

 

 —

Common stock, $.01 par value, 3,000,000 shares authorized, 565,833 shares outstanding at December 2019 and 552,614 shares outstanding at September 2019

 

 

8,692

 

 

8,561

Additional paid-in capital

 

 

24,192,954

 

 

23,165,639

Retained earnings

 

 

66,592,637

 

 

66,414,397

Treasury stock at cost

 

 

(28,840,011)

 

 

(28,831,855)

Total shareholders’ equity

 

 

61,954,272

 

 

60,756,742

Total liabilities and shareholders’ equity

 

$

147,600,457

 

$

157,711,622

 

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

3

Table of Contents

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

for the three months ended December 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

For the three months ended December

 

 

2019

 

2018

Sales (including excise taxes of $94.0 million and $93.0 million, respectively)

 

$

360,101,103

 

$

344,733,920

Cost of sales

 

 

339,256,392

 

 

324,101,782

Gross profit

 

 

20,844,711

 

 

20,632,138

Selling, general and administrative expenses

 

 

18,952,735

 

 

17,957,214

Depreciation and amortization

 

 

725,461

 

 

608,008

 

 

 

19,678,196

 

 

18,565,222

Operating income

 

 

1,166,515

 

 

2,066,916

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

Interest expense

 

 

472,423

 

 

322,950

Other (income), net

 

 

(6,778)

 

 

(3,355)

 

 

 

465,645

 

 

319,595

Income from operations before income taxes

 

 

700,870

 

 

1,747,321

Income tax expense

 

 

249,000

 

 

502,000

Net income available to common shareholders

 

$

451,870

 

$

1,245,321

 

 

 

 

 

 

 

Basic earnings per share available to common shareholders

 

$

0.80

 

$

2.02

Diluted earnings per share available to common shareholders

 

$

0.80

 

$

1.99

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

562,578

 

 

617,858

Diluted weighted average shares outstanding

 

 

567,794

 

 

624,525

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.18

 

$

0.18

 

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

 

 

4

Table of Contents

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Shareholders’ Equity

for the three months ended December  31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Paid in

 

Retained

 

 

 

 

   

Shares

   

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Total

THREE MONTHS ENDED DECEMBER 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 1, 2018

 

844,089

 

$

8,441

 

(228,312)

 

$

(21,324,752)

 

$

22,069,098

 

$

63,848,030

 

$

64,600,817

Dividends on common stock, $0.46 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(296,936)

 

 

(296,936)

Compensation expense and issuance of stock in connection with equity-based awards

 

11,950

 

 

120

 

 —

 

 

 —

 

 

1,041,615

 

 

 —

 

 

1,041,735

Repurchase of common stock

 

 —

 

 

 —

 

(10,432)

 

 

(918,085)

 

 

 —

 

 

 —

 

 

(918,085)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,245,321

 

 

1,245,321

Balance, December 31, 2018

 

856,039

 

$

8,561

 

(238,744)

 

$

(22,242,837)

 

$

23,110,713

 

$

64,796,415

 

$

65,672,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED DECEMBER 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, October 1, 2019

 

856,039

 

$

8,561

 

(303,425)

 

$

(28,831,855)

 

$

23,165,639

 

$

66,414,397

 

$

60,756,742

Dividends on common stock, $0.46 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(273,630)

 

 

(273,630)

Compensation expense and issuance of stock in connection with equity-based awards

 

13,328

 

 

131

 

 —

 

 

 —

 

 

1,027,315

 

 

 —

 

 

1,027,446

Repurchase of common stock

 

 —

 

 

 —

 

(109)

 

 

(8,156)

 

 

 —

 

 

 —

 

 

(8,156)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

451,870

 

 

451,870

Balance, December 31, 2019

 

869,367

 

$

8,692

 

(303,534)

 

$

(28,840,011)

 

$

24,192,954

 

$

66,592,637

 

$

61,954,272

 

 

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

 

 

5

Table of Contents

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the three months ended December  31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

December

 

December

 

    

2019

    

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

451,870

 

$

1,245,321

Adjustments to reconcile net income from operations to net cash flows from (used in)
operating activities:

 

 

 

 

 

 

Depreciation

 

 

725,461

 

 

592,383

Amortization

 

 

 —

 

 

15,625

Equity-based compensation

 

 

129,931

 

 

316,056

Deferred income taxes

 

 

154,792

 

 

276,942

Provision for losses on doubtful accounts

 

 

371,000

 

 

11,000

Inventory allowance

 

 

51,587

 

 

117,531

Other

 

 

(42,011)

 

 

989

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(7,171,661)

 

 

689,059

Inventories

 

 

39,333,140

 

 

22,199,828

Prepaid and other current assets

 

 

(1,578,437)

 

 

(4,321,455)

Other assets

 

 

42,052

 

 

50,265

Accounts payable

 

 

(1,623,841)

 

 

(4,261,996)

Accrued expenses and accrued wages, salaries and bonuses

 

 

(2,509,401)

 

 

(2,515,963)

Income taxes receivable

 

 

95,772

 

 

225,058

Net cash flows from (used in) operating activities

 

 

28,430,254

 

 

14,640,643

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,228,462)

 

 

(956,976)

Net cash flows from (used in) investing activities

 

 

(1,228,462)

 

 

(956,976)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

330,596,076

 

 

336,212,413

Repayments under revolving credit facility

 

 

(357,448,761)

 

 

(348,325,547)

Principal payments on long-term debt

 

 

(131,580)

 

 

(235,188)

Repurchase of common stock

 

 

(8,156)

 

 

(918,085)

Dividends on common stock

 

 

(107,084)

 

 

(116,196)

Net cash flows from (used in) financing activities

 

 

(27,099,505)

 

 

(13,382,603)

Net change in cash

 

 

102,287

 

 

301,064

Cash, beginning of period

 

 

337,704

 

 

520,644

Cash, end of period

 

$

439,991

 

$

821,708

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid during the period for interest

 

$

519,459

 

$

306,243

Cash paid (refunded) during the period for income taxes

 

 

(1,563)

 

 

 —

 

 

 

 

 

 

 

Supplemental disclosure of non-cash information:

 

 

 

 

 

 

Equipment acquisitions classified in accounts payable

 

$

234,816

 

$

200,782

Dividends declared, not paid

 

 

166,546

 

 

180,740

Issuance of common stock in connection with the vesting and exercise of
equity-based awards

 

 

990,653

 

 

1,005,792

 

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

 

6

Table of Contents

AMCON Distributing Company and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

 

AMCON Distributing Company and Subsidiaries (“AMCON” or the “Company”) operate 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 26 states and primarily operate in the Central, Rocky Mountain, and Mid-South regions of the United States.

 

·

Our retail health food segment (“Retail Segment”) operates twenty-two 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 4,100 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, 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 November 2019, Convenience Store News ranked us as the eighth (8th) 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, optimizing inventory, merchandising expertise, information systems, and accessing trade credit.

 

Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross-dock facilities, include approximately 685,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kelloggs, Kraft, and Mars. 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.

 

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Our Retail Segment operates twenty-two retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akins”), and Earth Origins Market (“EOM”). These stores carry over 33,000 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. Chamberlin’s, which was established in 1935, has a total of seven locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of seven locations in Arkansas, Missouri, and Oklahoma. Earth Origins Market has a total of eight locations in Florida.

    

FINANCIAL STATEMENTS

 

The Company’s fiscal year ends on September 30. 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, 2019, 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 December 31, 2019 and December 31, 2018 have been referred to throughout this quarterly report as Q1 2020 and Q1 2019, respectively. The fiscal balance sheet dates as of December 31, 2019 and September 30, 2019 have been referred to as December 2019 and September 2019, respectively.

 

ACCOUNTING PRONOUNCEMENTS

 

Accounting Pronouncement Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842)”. Accounting Standards Codification Topic (“ASC”) 842 supersedes the lease accounting requirements in “ASC 840 - Leases”. The most significant among the changes in ASU 2016-02 is the recognition of right-of-use (“ROU”) assets and corresponding lease liabilities for leases classified as operating leases. The accounting for finance leases, which were classified as capital leases under historical GAAP, remains substantially unchanged. The lease liabilities are equal to the present value of the remaining lease payments while the ROU asset is determined based on the amount of the lease liability, plus initial direct costs incurred less lease incentives. The Company elected the optional transition method to apply ASU 2016-02 prospectively at adoption during Q1 2020, which resulted in recognition of ROU assets of approximately $21.9 million, lease liabilities of $22.2 million, and a decrease of deferred rent recorded under ASC 840 of $0.3 million. The adoption of ASC 842 did not have a material effect on the Company’s consolidated statements of operations or cash flows. Comparative periods presented in the financial statements prior to Q1 2020 continue to be presented under ASC 840. The adoption of ASC 842 did not have a material impact on the Company’s debt-covenant compliance under its current revolving credit facility.

 

In accordance with an accounting policy election under ASC 842, the Company does not recognize assets or liabilities for leases with an initial term of twelve months or less; these short-term lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected the package of practical expedients within ASC 842 that allows an entity to not reassess, prior to the effective date, (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases. The Company also elected the practical expedient to account for non-lease components as part of the lease for all asset classes.

 

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New Accounting Pronouncements

 

In June 2016, the FASB issued 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.

 

2. INVENTORIES

 

Inventories consisted of finished goods and are stated at the lower of cost (determined on a FIFO basis for our wholesale segment and using the retail method for our retail segment) or net realizable value. 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 $1.1 million at December 2019 and $1.0 million at September 2019. 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.

 

3. LEASES

 

The Company’s wholesale segment leases certain warehouse facilities, office space, vehicles and office equipment. The Company’s retail segment leases store space in various shopping center complexes. Certain of the warehouse and retail store leases include one or more options to renew or terminate the applicable lease agreement, with the exercise of such options at the Company’s discretion. The Company’s leases do not contain any significant residual value guarantees nor do they impose any significant restrictions or covenants other than those customarily found in similar types of leases.

 

The operating right-of-use (ROU) lease assets and liabilities recorded on the Company’s balance sheet consist of fixed lease payments. Leases with an initial term of twelve months or less are not recorded on the balance sheet and are expensed on a straight-line basis over the lease term. Additionally, certain leases contain variable payments such as vehicle leases with per-mile charges or retail leases with an additional rent payment based on store performance. These variable payments are expensed as incurred. The Company combines lease components and non-lease components for all asset classes for purposes of recognizing lease assets and liabilities. The Company determines its incremental borrowing rates based on information available at the lease commencement date in calculating the present value of lease payments.

 

Leases consist of the following:

 

 

 

 

 

 

 

Assets

    

Classification

    

December 2019

Operating

 

Operating lease right-of-use assets

 

$

20,523,782

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current:

 

 

 

 

 

Operating

 

Operating lease liabilities

 

$

5,460,582

Non-current:

 

 

 

 

 

Operating

 

Long-term operating lease liabilities

 

 

15,397,681

Total lease liabilities

 

 

 

$

20,858,263

 

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The components of lease costs were as follows:

 

 

 

 

 

    

 

 

 

 

Total

THREE MONTHS ENDED DECEMBER 2019

 

 

 

Operating lease cost

 

$

1,670,774

Short-term lease cost

 

 

83,505

Variable lease cost

 

 

89,273

Net lease cost

 

$

1,843,552

 

Maturities of lease liabilities as of December 2019 were as follows:

 

 

 

 

 

 

    

Operating Leases

2020

 

$

6,185,910

2021

 

 

5,278,523

2022

 

 

4,081,106

2023

 

 

3,229,468

2024

 

 

2,117,859

2025 and thereafter

 

 

1,934,262

Total lease payments

 

 

22,827,128

Less: interest

 

 

(1,968,865)

Present value of lease liabilities

 

$

20,858,263

 

Weighted-average remaining lease term and weighted-average discount rate information regarding the Company’s leases were as follows:

 

 

 

 

 

Lease Term

    

December 2019

 

Weighted-average remaining lease term (years):

 

 

 

Operating

 

4.6

 

Discount Rate

 

 

 

Weighted-average discount rate:

 

 

 

Operating

 

4.04

%  

 

Other information regarding the Company’s leases were as follows:

 

 

 

 

 

 

    

For the three months ended December 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows used by operating leases

 

$

1,655,241

Lease liabilities arising from obtaining new ROU assets:

 

 

 

Operating leases

 

$

119,112

 

 

Future minimum operating lease payments as of September 2019, as reported in the 2019 Form 10-K under ASC 840, were as follows:

 

 

 

 

 

 

    

Operating

Fiscal Year Ending

 

Leases

2020

 

$

6,468,837

2021

 

 

5,418,617

2022

 

 

4,299,261

2023

 

 

3,216,671

2024

 

 

2,456,810

Thereafter

 

 

2,387,618

Total minimum lease payments

 

$

24,247,814

 

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4. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill by reporting segment of the Company consisted of the following:

 

 

 

 

 

 

 

 

 

    

December

    

September

 

 

2019

 

2019

Wholesale Segment

 

$

4,436,950

 

$

4,436,950

 

 

Other intangible assets of the Company consisted of the following:

 

 

 

 

 

 

 

 

 

    

December

    

September

 

 

2019

    

2019

Trademarks and tradenames (Retail Segment)

 

$

500,000

 

$

500,000

 

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. Goodwill recorded on the Company’s consolidated balance sheet represents amounts allocated to its wholesale reporting unit which totaled $4.4 million at both December 2019 and September 2019. 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 2019.

 

5. DIVIDENDS

 

The Company paid cash dividends on its common stock totaling $0.1 million in each of the three month periods ended December 2019 and December 2018.

 

6. EARNINGS PER SHARE

 

Basic earnings per share available to common shareholders is calculated by dividing net income less preferred stock dividend requirements by the weighted average common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing income from operations less preferred stock dividend requirements (when anti-dilutive) by the sum of the weighted average common shares outstanding and the weighted average dilutive equity awards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended December

 

 

2019

 

2018

 

    

Basic

    

Diluted

    

Basic

    

Diluted

Weighted average common shares outstanding

 

 

562,578

 

 

562,578

 

 

617,858

 

 

617,858

Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)

 

 

 —

 

 

5,216

 

 

 —

 

 

6,667

Weighted average number of shares outstanding

 

 

562,578

 

 

567,794

 

 

617,858

 

 

624,525

Net income available to common shareholders

 

$

451,870

 

$

451,870

 

$

1,245,321

 

$

1,245,321

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share available to common shareholders

 

$

0.80

 

$

0.80

 

$

2.02

 

$

1.99


(1)

Diluted earnings per share calculation includes all stock options and restricted stock units deemed to be dilutive.

 

 

 

 

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7. DEBT

 

The Company primarily finances its operations through a credit facility agreement (the “Facility”) and long-term debt agreements with banks. The Facility is provided through Bank of America acting as the senior agent and with BMO Harris Bank participating in a loan syndication.

 

The Facility included the following significant terms at December 2019:

 

·

A November 2022 maturity date without a penalty for prepayment.

 

·

$70.0 million revolving credit limit.

 

·

Loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million.

 

·

A provision providing an additional $10.0 million of credit advances for certain inventory purchases.

 

·

Evergreen renewal clause automatically renewing the agreement for one year unless either the borrower or lender provides written notice terminating the agreement at least 90 days prior to the end of any original or renewal term of the agreement.

 

·

The Facility bears interest at either the bank’s prime rate, or at LIBOR plus 125 - 150 basis points depending on certain credit facility utilization measures, at the election of the Company.

 

·

Lending limits subject to accounts receivable and inventory limitations.

 

·

An unused commitment fee equal to one-quarter of one percent (1/4%) per annum on the difference between the maximum loan limit and average monthly borrowings.

 

·

Secured by collateral including all of the Company’s equipment, intangibles, inventories, and accounts receivable.

 

·

A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement. The Company’s fixed charge coverage ratio is over 1.0 for the trailing twelve months.

 

·

Provides that the Company may pay up to $2.0 million of dividends on its common stock annually provided the Company is not in default before or after the dividend. Additionally, the Company may pay dividends on its common stock in excess of $2.0 million annually provided the Company meets certain excess availability and proforma fixed charge coverage ratios and is not in default before or after the dividend.

 

The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at December 2019 was $69.5 million, of which $33.5 million was outstanding, leaving $36.0 million available.

 

At December 2019, the revolving portion of the Company’s Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was 3.46% at December 2019. For the three months ended December 2019, our peak borrowings under the Facility were $71.6 million, and our average borrowings and average availability under the Facility were $45.8 million and $26.1 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 with BMO Harris Bank (the “Real Estate Loan”) which is also a participant lender on the Company’s revolving line of credit. The Real Estate Loan contains cross default provisions which cause the loan to be considered in default if the

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loans where BMO is a lender, including the revolving credit facility, are in default. There were no such cross defaults at December 2019. 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.

 

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. 

 

8. EQUITY-BASED INCENTIVE AWARDS

 

Omnibus Plans

 

The Company has two equity-based incentive plans, the 2014 Omnibus Incentive Plan and 2018 Omnibus Incentive Plan (collectively “the Omnibus Plans”), which provide for equity incentives to employees. Each Omnibus Plan was designed with the intent of encouraging employees to acquire a vested interest in the growth and performance of the Company. The Omnibus Plans together permit the issuance of up to 135,000 shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units, performance share awards as well as awards such as stock appreciation rights, performance units, performance shares, bonus shares, and dividend share awards payable in the form of common stock or cash. The number of shares issuable under the Omnibus Plans is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock. At December 2019, awards with respect to a total of 101,146 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plans and awards with respect to another 33,854 shares may be awarded under the Omnibus Plans.

 

Restricted Stock Units

 

At December 2019, the Compensation Committee of the Board of Directors had authorized and approved the following restricted stock unit awards to members of the Company’s management team pursuant to the provisions of the Company’s Omnibus Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Restricted
 Stock Units(1)

    

Restricted
 Stock Units(2)

    

Restricted
 Stock Units(3)

    

Restricted
 Stock Units(4)

Date of award:

 

 

October 2015

 

 

October 2017

 

 

October 2018

 

 

October 2019

Original number of awards issued:

 

 

13,250

 

 

13,000

 

 

15,050

 

 

14,550

Service period:

 

 

36 - 60 months

 

 

36 months 

 

 

36 months 

 

 

36 months

Estimated fair value of award at grant date:

 

$

1,112,000

 

$

1,177,000

 

$

1,264,000

 

$

1,007,000

Non-vested awards outstanding at
December 31, 2019:

 

 

50

 

 

4,334

 

 

10,037

 

 

14,550

Fair value of non-vested awards at
December 31, 2019 of approximately:

 

$

4,000

 

$

312,000

 

$

723,000

 

$

1,048,000

(1)13,200 of the restricted stock units were vested as of December 2019. The remaining 50 restricted stock units will vest in October 2020.

(2)8,666 of the restricted stock units were vested as of December 2019. The remaining 4,334 restricted stock units will vest in October 2020.

(3)5,013 of the restricted stock units were vested as of December 2019. 5,018 restricted stock units will vest in October 2020 and 5,019 will vest in October 2021.

(4)The 14,550 restricted stock units will vest in equal amounts in October 2020, October 2021, and October 2022.

There is no direct cost to the recipients of the restricted stock units, except for any applicable taxes. The restricted stock units are subject to the customary adjustments in the event of stock splits, stock dividends, and certain other distributions

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of the Company’s common stock. All cash dividends and/or distributions payable to restricted stock recipients will be held in escrow until all the conditions of vesting have been met.

 

The restricted stock units provide that the recipients can elect, at their option, to receive either common stock in the Company, or a cash settlement based upon the closing price of the Company’s shares, at the time of vesting. Based on these award provisions, the compensation expense recorded in the Company’s Statement of Operations reflects the straight‑line amortized fair value based on the period end closing price under the liability method.

 

The following summarizes restricted stock unit activity under the Omnibus Plans during Q1 2020:

 

 

 

 

 

 

 

 

 

Number

 

Weighted

 

 

of

 

Average

 

    

Shares

    

Fair Value

Nonvested restricted stocks units at September 2019

 

28,151

 

$

76.25

Granted

 

14,550

 

 

69.20

Vested

 

(13,730)

 

 

74.02

Expired

 

 —

 

 

 —

Nonvested restricted stocks units at December  2019

 

28,971

 

$

72.01

 

All Equity-Based Awards (stock options and restricted stock units)

 

Net income before income taxes included compensation expense of approximately $0.1 million and $0.3 million during Q1 2020 and Q1 2019 respectively, related to the amortization of all equity-based compensation awards. Total unamortized compensation expense related to these awards at December 2019 and September 2019 was approximately $2.3 million and $1.6 million, respectively.

 

 

 

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9. BUSINESS SEGMENTS

 

The Company has two reportable business segments: the wholesale distribution of consumer products and the retail sale of health and natural food products. The retail health food stores’ operations are aggregated to comprise the Retail Segment because such operations have similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products and the methods used to sell the products. Included in the “Other” column are intercompany eliminations, and assets held and charges incurred by our holding company. The segments are evaluated on revenues, gross margins, operating income (loss), and income (loss) before taxes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

Retail

 

 

 

 

 

 

Segment

 

Segment

 

Other

 

Consolidated

THREE MONTHS ENDED DECEMBER 2019

 

 

 

 

 

 

 

 

 

 

 

 

External revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

245,050,054

 

$

 —

 

$

 —

 

$

245,050,054

Tobacco 

 

 

54,317,548

 

 

 —

 

 

 —

 

 

54,317,548

Confectionery

 

 

20,836,862

 

 

 —

 

 

 —

 

 

20,836,862

Health food

 

 

 —

 

 

10,096,495

 

 

 —

 

 

10,096,495

Foodservice & other

 

 

29,800,144

 

 

 —

 

 

 —

 

 

29,800,144

Total external revenue

 

 

350,004,608

 

 

10,096,495

 

 

 —

 

 

360,101,103

Depreciation

 

 

432,263

 

 

293,198

 

 

 —

 

 

725,461

Amortization

 

 

 —

 

 

 

 

 

 

 —

Operating income (loss)

 

 

3,649,014

 

 

(1,142,306)

 

 

(1,340,193)

 

 

1,166,515

Interest expense

 

 

33,974

 

 

 —

 

 

438,449

 

 

472,423

Income (loss) from operations before taxes

 

 

3,619,664

 

 

(1,140,152)

 

 

(1,778,642)

 

 

700,870

Total assets

 

 

125,529,755

 

 

21,947,811

 

 

122,891

 

 

147,600,457

Capital expenditures

 

 

793,681

 

 

600,344

 

 

 —

 

 

1,394,025

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED DECEMBER 2018

 

 

 

 

 

 

 

 

 

 

 

 

External revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Cigarettes

 

$

238,361,582

 

$

 —

 

$

 —

 

$

238,361,582

Tobacco

 

 

48,195,046

 

 

 —

 

 

 —

 

 

48,195,046

Confectionery

 

 

19,717,666

 

 

 —

 

 

 —

 

 

19,717,666

Health food

 

 

 

 

10,990,623

 

 

 —

 

 

10,990,623

Foodservice & other

 

 

27,469,003

 

 

 —

 

 

 —

 

 

27,469,003

Total external revenue

 

 

333,743,297

 

 

10,990,623

 

 

 —

 

 

344,733,920

Depreciation

 

 

364,132

 

 

228,251

 

 

 —

 

 

592,383

Amortization

 

 

15,625

 

 

 

 

 

 

15,625

Operating income (loss)

 

 

3,703,884

 

 

(45,443)

 

 

(1,591,525)

 

 

2,066,916

Interest expense

 

 

37,774

 

 

 —

 

 

285,176

 

 

322,950

Income (loss) from operations before taxes

 

 

3,667,924

 

 

(43,901)

 

 

(1,876,702)

 

 

1,747,321

Total assets

 

 

105,897,386

 

 

15,838,092

 

 

96,951

 

 

121,832,429

Capital expenditures

 

 

784,116

 

 

372,389

 

 

 —

 

 

1,156,505

 

 

 

 

10. COMMON STOCK REPURCHASE

 

The Company repurchased 109 shares of its common stock during Q1 2020 for cash in an amount less than $0.1 million and 10,432 shares of its common stock during Q1 2019 for cash totaling approximately $0.9 million. All repurchased shares were recorded in treasury stock at cost.

 

 

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11. SUBSEQUENT EVENT

 

In January 2020, the Company entered into a definitive agreement with Chas. M. Sledd Company (“Sledd”), a West Virginia wholesale distributor serving the convenience store industry. The agreement provides that the Company and Sledd are to jointly own a limited liability company (“Team Sledd”). Sledd would contribute subatantially all of its assets and stated liabilities to Team Sledd, while the Company would contribute $10.0 million in cash, of which $6.5 million is structured as equity and $3.5 million as a secured line of credit to Team Sledd. The Company will hold a minority interest in Team Sledd and anticipates it will fund its contribution to Team Sledd from the Company’s revolving credit facility. The transaction is expected to close during the Company’s second fiscal quarter, subject to the satisfaction of customary conditions.

 

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Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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:

 

·

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,

 

·

risks associated with the acquisition of assets or new businesses 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,

·

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 of ongoing trade tariffs may have on our product costs or on consumer disposable income and demand,

 

·

increases in fuel costs and expenses associated with operating a refrigerated trucking fleet,

 

·

the risks associated with a highly competitive labor market, particularly for truck drivers and warehouse workers, which may impact our ability to recruit and retain employees and result in higher employee compensation costs,

 

·

increases in state and federal excise taxes on cigarette and tobacco products and the potential impact on demand,

 

·

higher commodity prices and general inflation which 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 United States Food and Drug Administration (“FDA”), state or local governmental agencies, or other parties,

 

 

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·

increases in manufacturer prices,

 

·

increases in inventory carrying costs and customer credit risks,

 

·

changes in promotional and incentive programs offered by manufacturers,

 

·

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,

 

·

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, 2019, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the three months ended December 2019 other than the adoption of ASC 842 which did have a material impact on the Company’s consolidated balance sheet.

 

 

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FIRST FISCAL QUARTER 2020 (Q1 2020)

 

The following discussion and analysis includes the Company’s results of operations for the three months ended December 2019 and December 2018:

 

Wholesale Segment

 

Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,100 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, 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 November 2019, Convenience Store News ranked us as the eighth (8th) 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, optimizing inventory, merchandising expertise, information systems, and accessing trade credit.

 

Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross-dock facilities, include approximately 685,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kelloggs, Kraft, and Mars. 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 twenty-two retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akins”), and Earth Origins Market (“EOM”). These stores carry over 33,000 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. Chamberlin’s, which was established in 1935, has a total of seven locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of seven locations in Arkansas, Missouri, and Oklahoma. Earth Origins Market has a total of eight locations in Florida.

 

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RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

Incr (Decr)

    

% Change

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

 

 

Sales(1)

 

$

360,101,103

 

$

344,733,920

 

$

15,367,183

 

4.5

Cost of sales

 

 

339,256,392

 

 

324,101,782

 

 

15,154,610

 

4.7

Gross profit

 

 

20,844,711

 

 

20,632,138

 

 

212,573

 

1.0

Gross profit percentage

 

 

5.8

%  

 

6.0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

$

19,678,196

 

$

18,565,222

 

$

1,112,974

 

6.0

Operating income

 

 

1,166,515

 

 

2,066,916

 

 

(900,401)

 

(43.6)

Interest expense

 

 

472,423

 

 

322,950

 

 

149,473

 

46.3

Income tax expense

 

 

249,000

 

 

502,000

 

 

(253,000)

 

(50.4)

Net income

 

 

451,870

 

 

1,245,321

 

 

(793,451)

 

(63.7)

 

 

 

 

 

 

 

 

 

 

 

 

BUSINESS SEGMENTS:

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

350,004,608

 

$

333,743,297

 

$

16,261,311

 

4.9

Gross profit

 

 

17,586,795

 

 

16,071,334

 

 

1,515,461

 

9.4

Gross profit percentage

 

 

5.0

%  

 

4.8

%  

 

 

 

 

Retail

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

10,096,495

 

$

10,990,623

 

$

(894,128)

 

(8.1)

Gross profit

 

 

3,257,916

 

 

4,560,804

 

 

(1,302,888)

 

(28.6)

Gross profit percentage

 

 

32.3

%  

 

41.5

%  

 

 

 

 


(1)

Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $6.1 million in Q1 2020 and $6.0 million in Q1 2019.

 

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 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 – Q1 2020 vs. Q1 2019

 

Sales in our Wholesale Segment increased $16.3 million during Q1 2020 as compared to Q1 2019. Significant items impacting sales during Q1 2020 included a $9.4 million increase in sales related to price increases implemented by cigarette manufacturers, a $9.6 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”) and a $3.8 million increase in sales related to an increase in cigarette state excise taxes. These increases were partially offset by a $6.5 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment decreased $0.9 million for Q1 2020 as compared to Q1 2019. This decrease was primarily due to lower sales volumes in our existing stores.

 

GROSS PROFIT – Q1 2020 vs. Q1 2019

 

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

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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 $1.5 million during Q1 2020 as compared to Q1 2019. Significant items impacting gross profit during Q1 2020 included a $1.0 million increase in gross profit related to higher sales volumes and promotions in our Other Products category,  a $0.2 million increase in gross profit related to the volume and mix of cigarette cartons sold and a $0.3 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods. Gross profit in our Retail Segment decreased $1.3 million during Q1 2020 as compared to Q1 2019 primarily related to lower sales and gross margins in our existing stores.

 

OPERATING EXPENSE – Q1 2020 vs. Q1 2019

 

Operating expense includes selling, general and administrative expenses and depreciation and amortization. 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 Q1 2020 operating expenses increased $1.1 million as compared to Q1 2019. Significant items impacting operating expenses during Q1 2020 included a $0.8 million increase in employee compensation and benefit costs, a $0.3 million increase in our provision for doubtful accounts, a $0.2 million increase in other operational expenses, offset by a $0.2 million decrease in expenses in our Retail Segment. The change in our Retail Segment operating expenses was primarily related to reduced payroll and compensation costs.

 

INCOME TAX EXPENSE – Q1 2020 vs. Q1 2019

 

The change in the Q1 2020 income tax rate as compared to Q1 2019, was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.

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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.

In general, the Company finances its operations through a credit facility agreement (the “Facility”) with Bank of America acting as the senior agent and with BMO Harris Bank participating in the loan syndication. The Facility included the following significant terms at December 2019:

·

A November 2022 maturity date without a penalty for prepayment.

 

·

$70.0 million revolving credit limit.

 

·

Loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million.

 

·

A provision providing an additional $10.0 million of credit advances for certain inventory purchases.

 

·

Evergreen renewal clause automatically renewing the agreement for one year unless either the borrower or lender provides written notice terminating the agreement at least 90 days prior to the end of any original or renewal term of the agreement.

 

·

The Facility bears interest at either the bank’s prime rate, or at LIBOR plus 125 - 150 basis points depending on certain credit facility utilization measures, at the election of the Company.

 

·

Lending limits subject to accounts receivable and inventory limitations.

 

·

An unused commitment fee equal to one-quarter of one percent (1/4%) per annum on the difference between the maximum loan limit and average monthly borrowings.

 

·

Secured by collateral including all of the Company’s equipment, intangibles, inventories, and accounts receivable.

 

·

A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement. The Company’s fixed charge ratio is over 1.0 for the trailing twelve months.

 

·

Provides that the Company may pay up to $2.0 million of dividends on its common stock annually provided the Company is not in default before or after the dividend.  Additionally, the Company may pay dividends on its common stock in excess of $2.0 million annually provided the Company meets certain excess availability and proforma fixed charge coverage ratios and is not in default before or after the dividend.

 

The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at December 2019 was $69.5 million, of which $33.5 million was outstanding, leaving $36.0 million available.

 

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At December 2019, the revolving portion of the Company’s Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was 3.46% at December 2019. For the three months ended December 2019, our peak borrowings under the Facility were $71.6 million, and our average borrowings and average availability under the Facility were $45.8 million and $26.1 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 with BMO Harris Bank (the “Real Estate Loan”) which is also a participant lender on the Company’s revolving line of credit. The Real Estate Loan contains cross default provisions which cause the loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, are in default. There were no such cross defaults at December 2019. 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.

 

Dividends Payments

 

The Company paid cash dividends on its common stock totaling $0.1 million in each of the three month periods ended December 2019 and December 2018.

 

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.

 

Liquidity Risk

 

The Company’s liquidity position is significantly influenced by its ability to maintain sufficient levels of working capital. For our Company and 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, a precipitous change in operating environment could materially impact the Company’s future revenue stream 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 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 December 31, 2019 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.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 2019, 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, 2019.

 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the quarterly period ended December 2019:

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares (or Units) Purchased

 

Average Price Paid per Share (or Unit)

 

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

 

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs*

October 1 - 31, 2019

 

 —

 

$

 —

 

 —

 

75,000

November 1 - 30, 2019

 

48

 

$

70.90

 

48

 

74,952

December 1 - 31, 2019

 

61

 

$

72.18

 

61

 

75,000

Total

 

109

 

$

71.61

 

109

 

75,000


*  In December 2019, the Company’s Board of Directors replenished the existing share repurchase authority to authorize purchases of up to 75,000 shares of the Company’s common stock in open market or negotiated transactions. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

 

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

 

 

 

 

 

 

31.1

Certification by Christopher H. Atayan, Chief Executive Officer and Chairman,  pursuant to section 302 of the Sarbanes-Oxley Act

 

 

 

 

31.2

Certification by Andrew C. Plummer, President and Chief Financial Officer, pursuant to section 302 of the Sarbanes-Oxley Act

 

 

 

 

32.1

Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, furnished pursuant to section 906 of the Sarbanes-Oxley Act

 

 

 

 

32.2

Certification by Andrew C. Plummer, President and Chief Financial Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act

 

 

 

 

101

Interactive Data File (filed herewith electronically)

 

 

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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: January 21, 2020

/s/ Christopher H. Atayan

 

Christopher H. Atayan,

 

Chief Executive Officer and Chairman

 

 

Date: January 21, 2020

/s/ Andrew C. Plummer

 

Andrew C. Plummer,

 

President and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

27


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
12/15/22
Filed on:1/21/208-K
1/15/20
For Period end:12/31/19
10/1/19
9/30/1910-K
12/31/1810-Q
10/1/18
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