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AMCON DISTRIBUTING CO - Quarter Report: 2021 June (Form 10-Q)

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 June 30, 2021

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 551,369 shares of its $.01 par value common stock outstanding as of July 16, 2021.

Table of Contents

Form 10-Q

3rd Quarter

INDEX

June 30, 2021

PAGE

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed consolidated balance sheets at June 30, 2021 (unaudited) and September 30, 2020

3

Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2021 and 2020

4

Condensed consolidated unaudited statements of shareholders’ equity for the three and nine months ended June 30, 2021 and 2020

5

Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2021 and 2020

6

Notes to condensed consolidated unaudited financial statements

7

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

14

Item 3. Quantitative and Qualitative Disclosures About Market Risk

21

Item 4. Controls and Procedures

22

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

23

Item 1A. Risk Factors

23

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

23

Item 3. Defaults Upon Senior Securities

23

Item 4. Mine Safety Disclosures

23

Item 5. Other Information

23

Item 6. Exhibits

23

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PART I — FINANCIAL INFORMATION

Item 1.      Financial Statements

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2021 and September 30, 2020

June

September

    

2021

    

2020

(Unaudited)

ASSETS

Current assets:

Cash

$

699,895

$

661,195

Accounts receivable, less allowance for doubtful accounts of $0.9 million at June 2021 and September 2020

 

36,526,770

 

34,278,429

Inventories, net

 

95,640,441

 

98,971,773

Prepaid and other current assets

 

5,769,066

 

2,091,645

Total current assets

 

138,636,172

 

136,003,042

Property and equipment, net

 

16,425,171

 

17,497,274

Operating lease right-of-use assets, net

17,148,745

18,936,126

Note receivable

3,500,000

3,500,000

Goodwill

 

4,436,950

 

4,436,950

Other intangible assets, net

 

500,000

 

500,000

Equity method investment

7,784,753

6,744,095

Other assets

 

349,139

 

383,786

Total assets

$

188,780,930

$

188,001,273

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

24,788,839

$

22,108,299

Accrued expenses

 

11,169,530

 

8,306,160

Accrued wages, salaries and bonuses

 

3,839,072

 

4,761,020

Income taxes payable

 

495,860

 

567,408

Current operating lease liabilities

5,503,940

5,607,098

Current maturities of long-term debt

 

555,832

 

516,850

Total current liabilities

 

46,353,073

 

41,866,835

Credit facility

 

51,491,984

 

61,971,682

Deferred income tax liability, net

 

1,585,882

 

1,806,575

Long-term operating lease liabilities

12,000,823

14,028,606

Long-term debt, less current maturities

 

5,196,596

 

2,608,794

Other long-term liabilities

 

757,387

 

927,241

Shareholders’ equity:

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

 

 

Common stock, $.01 par value, 3,000,000 shares authorized, 551,369 shares outstanding at June 2021 and 537,715 shares outstanding at September 2020

 

8,834

 

8,697

Additional paid-in capital

 

24,943,292

 

24,282,058

Retained earnings

 

77,310,346

 

71,362,334

Treasury stock at cost

 

(30,867,287)

 

(30,861,549)

Total shareholders’ equity

 

71,395,185

 

64,791,540

Total liabilities and shareholders’ equity

$

188,780,930

$

188,001,273

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

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

for the three and nine months ended June 30, 2021 and 2020

For the three months ended June

For the nine months ended June

   

2021

  

2020

  

2021

  

2020

Sales (including excise taxes of $104.9 million and $103.6 million, and $297.4 million and $285.1 million, respectively)

$

438,313,030

$

396,854,324

$

1,221,571,294

$

1,094,841,943

Cost of sales

 

412,771,324

 

375,202,044

 

1,149,594,823

 

1,031,651,499

Gross profit

 

25,541,706

 

21,652,280

 

71,976,471

 

63,190,444

Selling, general and administrative expenses

 

20,501,117

 

18,377,641

 

58,123,100

 

55,843,266

Depreciation

 

741,180

 

801,683

 

2,295,390

 

2,318,045

 

21,242,297

 

19,179,324

 

60,418,490

 

58,161,311

Operating income

 

4,299,409

 

2,472,956

 

11,557,981

 

5,029,133

Other expense (income):

Interest expense

 

329,929

 

461,581

 

1,016,902

 

1,321,267

Other (income), net

 

(43,437)

 

(42,525)

 

(169,525)

 

(79,222)

 

286,492

 

419,056

 

847,377

 

1,242,045

Income from operations before income taxes

 

4,012,917

 

2,053,900

 

10,710,604

 

3,787,088

Income tax expense

 

1,076,000

 

586,000

 

2,916,000

 

1,168,000

Equity method investment earnings, net of tax

 

754,293

 

111,666

 

1,403,124

 

111,666

Net income available to common shareholders

$

3,691,210

$

1,579,566

$

9,197,728

$

2,730,754

Basic earnings per share available to common shareholders

$

6.69

$

2.79

$

16.71

$

4.84

Diluted earnings per share available to common shareholders

$

6.48

$

2.77

$

16.37

$

4.79

Basic weighted average shares outstanding

 

551,369

 

565,483

 

550,276

 

564,578

Diluted weighted average shares outstanding

 

569,481

 

569,902

 

561,940

 

569,873

 

Dividends declared and paid per common share

$

0.18

$

0.18

$

5.54

$

0.82

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

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Shareholders’ Equity

for the three and nine months ended June 30, 2021 and 2020

Additional

Common Stock

Treasury Stock

Paid-in

Retained

   

Shares

   

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Total

THREE MONTHS ENDED JUNE 2020

Balance, April 1, 2020

 

869,367

$

8,692

 

(303,841)

$

(28,863,654)

$

24,224,145

$

67,184,900

$

62,554,083

Dividends on common stock, $0.18 per share

 

(107,091)

(107,091)

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

 

500

5

26,728

26,733

Repurchase of common stock

(1,148)

(68,725)

(68,725)

Net income

 

 

1,579,566

1,579,566

Balance, June 30, 2020

 

869,867

$

8,697

 

(304,989)

$

(28,932,379)

$

24,250,873

$

68,657,375

$

63,984,566

THREE MONTHS ENDED JUNE 2021

Balance, April 1, 2021

 

883,589

$

8,834

 

(332,220)

$

(30,867,287)

$

24,917,765

$

73,724,722

$

67,784,034

Dividends on common stock, $0.18 per share

 

(105,586)

(105,586)

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

 

25,527

25,527

Repurchase of common stock

Net income

 

 

3,691,210

3,691,210

Balance, June 30, 2021

 

883,589

$

8,834

 

(332,220)

$

(30,867,287)

$

24,943,292

$

77,310,346

$

71,395,185

Additional

Common Stock

Treasury Stock

Paid-in

Retained

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Total

NINE MONTHS ENDED JUNE 2020

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, $0.82 per share

(487,776)

(487,776)

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

13,828

136

1,085,234

1,085,370

Repurchase of common stock

(1,564)

(100,524)

(100,524)

Net income

 

2,730,754

2,730,754

Balance, June 30, 2020

869,867

$

8,697

(304,989)

$

(28,932,379)

$

24,250,873

$

68,657,375

$

63,984,566

NINE MONTHS ENDED JUNE 2021

Balance, October 1, 2020

869,867

$

8,697

(332,152)

$

(30,861,549)

$

24,282,058

$

71,362,334

$

64,791,540

Dividends on common stock, $5.54 per share

(3,249,716)

(3,249,716)

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

13,722

137

661,234

661,371

Repurchase of common stock

(68)

(5,738)

(5,738)

Net income

 

9,197,728

9,197,728

Balance, June 30, 2021

883,589

$

8,834

(332,220)

$

(30,867,287)

$

24,943,292

$

77,310,346

$

71,395,185

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

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AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the nine months ended June 30, 2021 and 2020

June

June

    

2021

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

9,197,728

$

2,730,754

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

Depreciation

2,295,390

2,318,045

Equity method investment earnings, net of tax

(1,403,124)

(111,666)

(Gain) loss on sales of property and equipment

(8,057)

17,042

Equity-based compensation

1,819,272

765,704

Deferred income taxes

(220,693)

(2,862)

Provision for losses on doubtful accounts

86,000

349,000

Inventory allowance

238,148

182,218

Changes in assets and liabilities:

Accounts receivable

(2,334,341)

(9,309,422)

Inventories

3,093,184

20,152,080

Prepaid and other current assets

(3,677,421)

(373,414)

Equity method investment distributions

828,466

Other assets

34,647

(126,364)

Accounts payable

2,680,540

2,040,386

Accrued expenses and accrued wages, salaries and bonuses

804,983

(1,424,472)

Other long-term liabilities

(169,854)

125,744

Income taxes payable and receivable

(537,548)

794,027

Net cash flows from (used in) operating activities

12,727,320

18,126,800

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment

(1,254,958)

(2,901,134)

Proceeds from sales of property and equipment

39,728

16,600

Investment in equity method investee

(6,500,000)

Issuance of note receivable

(3,500,000)

Net cash flows from (used in) investing activities

(1,215,230)

(12,884,534)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under revolving credit facility

1,217,375,073

1,083,878,207

Repayments under revolving credit facility

(1,227,854,771)

(1,087,870,919)

Proceeds from borrowings on long-term debt

3,000,000

Principal payments on long-term debt

(373,216)

(397,936)

Proceeds from exercise of stock options

25,750

Repurchase of common stock

(5,738)

(100,524)

Dividends on common stock

(3,249,716)

(487,776)

Settlement and withholdings of equity-based awards

(365,022)

(30,208)

Net cash flows from (used in) financing activities

(11,473,390)

(4,983,406)

Net change in cash

38,700

258,860

Cash, beginning of period

661,195

337,704

Cash, end of period

$

699,895

$

596,564

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$

1,031,457

$

1,387,381

Cash paid during the period for income taxes

 

3,667,036

 

376,835

Supplemental disclosure of non-cash information:

Equipment acquisitions classified in accounts payable

$

$

100,424

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

 

949,812

 

990,653

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

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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 customers in 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 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 December 2020, Convenience Store News ranked us as the seventh (7th) 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 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 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.

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Our Retail Segment operates twenty 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 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 six locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. EOM 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, 2020, 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, 2021 and June 30, 2020 have been referred to throughout this quarterly report as Q3 2021 and Q3 2020, respectively. The fiscal balance sheet dates as of June 30, 2021 and September 30, 2020 have been referred to as June 2021 and September 2020, respectively.

ACCOUNTING 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.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The amendments in this update were effective upon issuance for all entities through December 31, 2022. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.

2. 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 $1.0 million at June 2021 and $0.7 million at September 2020. 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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3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill at June 2021 and September 2020 was as follows:

    

June

    

September

2021

2020

Wholesale Segment

$

4,436,950

$

4,436,950

Other intangible assets at June 2021 and September 2020 consisted of the following:

    

June

    

September

2021

    

2020

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 June 2021 and September 2020. 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 2020.

4. EQUITY METHOD INVESTMENT

In April 2020, the Company completed a transaction with Chas. M. Sledd Company (“Sledd”), a West Virginia wholesale distributor serving the convenience store industry, to jointly own and operate a limited liability company (“Team Sledd”) formed for the purpose of owning and operating Sledd’s wholesale distribution business. Sledd contributed substantially all of its assets and stated liabilities to Team Sledd, while the Company contributed $10.0 million in cash, of which $6.5 million was structured as equity and $3.5 million was structured as a secured loan to Team Sledd which is subordinate to the liens of Team Sledd's existing secured lenders.

At June 2021, AMCON owned approximately 49% of Team Sledd’s outstanding equity, with a carrying value of $7.8 million. For the three and nine months ended June 2021, the Company recognized $0.8 million and $1.4 million, respectively, in equity in earnings (net of income taxes) from its investment in Team Sledd. For the three months ended June 2020, the Company recognized $0.1 million in equity in earnings (net of income taxes) from its investment in Team Sledd. The Company’s secured loan to Team Sledd had a carrying value of $3.5 million as of June 2021. 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 the percentage of the outstanding equity of Team Sledd owned by AMCON.

Team Sledd’s summarized unaudited financial data for the three and nine months ended June 2021 and the three months ended June 2020 was as follows:

    

For the three months ended June 2021

    

For the nine months ended June 2021

    

For the three months ended June 2020

Sales

$

179,676,748

$

502,704,216

$

171,805,323

Gross profit

9,711,966

25,279,274

6,874,963

Net income before income taxes

2,034,258

3,979,078

335,093

Net income attributable to AMCON, net of tax

754,293

1,403,124

111,666

5. DIVIDENDS

The Company paid cash dividends on its common stock totaling $0.1 million and $3.2 million for the three and nine month periods ended June 30, 2021, respectively, and $0.1 million and $0.5 million for the three and nine month periods ended June 30, 2020, respectively.

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6. EARNINGS PER SHARE

Basic earnings per share available to common shareholders is calculated by dividing net income by the weighted average number of common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing income from operations by the sum of the weighted average number of common shares outstanding and the weighted average dilutive equity awards.

For the three months ended June

2021

2020

    

Basic

    

Diluted

    

Basic

    

Diluted

Weighted average number of common shares outstanding

551,369

551,369

565,483

565,483

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

18,112

4,419

Weighted average number of shares outstanding

551,369

569,481

565,483

569,902

Net income available to common shareholders

$

3,691,210

$

3,691,210

$

1,579,566

$

1,579,566

Net earnings per share available to common shareholders

$

6.69

$

6.48

$

2.79

$

2.77

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

For the nine months ended June

2021

2020

    

Basic

    

Diluted

    

Basic

    

Diluted

Weighted average number of common shares outstanding

550,276

550,276

564,578

564,578

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

11,664

5,295

Weighted average number of shares outstanding

550,276

561,940

564,578

569,873

Net income available to common shareholders

$

9,197,728

$

9,197,728

$

2,730,754

$

2,730,754

Net earnings per share available to common shareholders

$

16.71

$

16.37

$

4.84

$

4.79

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

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 (“BMO”) participating in a loan syndication.

CREDIT FACILITY

The Facility included the following significant terms at June 2021:

A March 2025 maturity date without a penalty for prepayment.

$110.0 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.

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The Facility bears interest at either the bank’s prime rate, or at LIBOR (or equivalent successor rate index) plus 125 - 150 basis points depending on certain credit facility utilization measures, at the election of the Company. For this purpose, in no event shall LIBOR be less than 50 basis points.

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 was over 1.0 for the trailing twelve months.

Provides that the Company may use up to $3.5 million annually, on a collective basis, for the payment of dividends on its common stock, or other distributions or investments, provided the Company is not in default before or after such dividends, distributions or investments. Additionally, the Company may pay dividends on its common stock, or make other distributions or investments in excess of $3.5 million annually provided the Company meets certain excess availability and proforma fixed charge coverage ratios and is not in default before or after such dividends, distributions or investments.

The amount available for use from 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 June 2021 was $109.5 million, of which $51.5 million was outstanding, leaving $58.0 million available.

At June 2021, 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 1.96% at June 2021. For the nine months ended June 2021, our peak borrowings under the Facility were $71.7 million, and our average borrowings and average availability under the Facility were $44.8 million and $44.0 million, respectively.

LONG-TERM DEBT

In addition to the Facility, the Company also had the following long term obligations at June 2021.

    

June 2021

    

September 2020

Real Estate Loan, interest payable at a fixed rate of 3.625% with monthly installments of principal and interest of $47,399 through February 2025 with remaining principal due March 2025, collateralized by three distribution facilities

$

4,599,036

$

1,866,231

Note payable, interest payable at a fixed rate of 4.50% with quarterly installments of principal and interest of $49,114 through June 2023 with remaining principal due September 2023

 

1,153,392

 

1,259,413

 

5,752,428

 

3,125,644

Less current maturities

 

(555,832)

 

(516,850)

$

5,196,596

$

2,608,794

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 (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 would cause the loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, were in default. There were no such cross defaults at June

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2021. 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. 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, 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.

Wholesale

Retail

    

Segment

    

Segment

    

Other

    

Consolidated

THREE MONTHS ENDED JUNE 2021

External revenues:

Cigarettes

$

294,690,427

$

$

$

294,690,427

Tobacco

68,525,147

68,525,147

Confectionery

25,703,325

25,703,325

Health food

11,745,769

11,745,769

Foodservice & other

37,648,362

37,648,362

Total external revenue

426,567,261

11,745,769

438,313,030

Depreciation

445,831

295,349

741,180

Operating income (loss)

6,349,783

621,421

(2,671,795)

4,299,409

Interest expense

56,924

273,005

329,929

Income (loss) from operations before taxes

6,304,328

624,447

(2,915,858)

4,012,917

Equity method investment earnings, net of tax

754,293

754,293

Total assets

159,766,283

17,140,050

11,874,597

188,780,930

Capital expenditures

384,429

133,732

518,161

Wholesale

Retail

    

Segment

    

Segment

    

Other

    

Consolidated

THREE MONTHS ENDED JUNE 2020

External revenue:

Cigarettes

$

276,348,474

$

$

$

276,348,474

Tobacco

59,487,110

59,487,110

Confectionery

20,614,034

20,614,034

Health food

11,538,319

11,538,319

Foodservice & other

28,866,387

28,866,387

Total external revenue

385,316,005

11,538,319

396,854,324

Depreciation

452,025

349,658

801,683

Operating income (loss)

4,350,347

(159,706)

(1,717,685)

2,472,956

Interest expense

31,623

429,958

461,581

Income (loss) from operations before taxes

4,329,679

(157,273)

(2,118,506)

2,053,900

Equity method investment earnings, net of tax

111,666

111,666

Total assets

146,782,772

19,584,013

10,551,204

176,917,989

Capital expenditures

575,462

174,374

749,836

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Wholesale

Retail

    

Segment

    

Segment

    

Other

    

Consolidated

NINE MONTHS ENDED JUNE 2021

External revenue:

Cigarettes

$

826,838,177

$

$

$

826,838,177

Tobacco

194,802,459

194,802,459

Confectionery

65,769,418

65,769,418

Health food

35,199,199

35,199,199

Foodservice & other

98,962,041

98,962,041

Total external revenue

1,186,372,095

35,199,199

1,221,571,294

Depreciation

1,405,528

889,862

2,295,390

Operating income (loss)

16,569,154

1,167,737

(6,178,910)

11,557,981

Interest expense

144,569

872,333

1,016,902

Income (loss) from operations before taxes

16,499,529

1,176,481

(6,965,406)

10,710,604

Equity method investment earnings, net of tax

1,403,124

1,403,124

Total assets

159,766,283

17,140,050

11,874,597

188,780,930

Capital expenditures

977,860

277,098

1,254,958

Wholesale

Retail

    

Segment

    

Segment

    

Other

    

Consolidated

NINE MONTHS ENDED JUNE 2020

External revenue:

Cigarettes

$

750,264,131

$

$

$

750,264,131

Tobacco

165,443,803

165,443,803

Confectionery

59,477,946

59,477,946

Health food

34,629,465

34,629,465

Foodservice & other

85,026,598

85,026,598

Total external revenue

1,060,212,478

34,629,465

1,094,841,943

Depreciation

1,327,431

990,614

2,318,045

Operating income (loss)

10,907,179

(1,216,491)

(4,661,555)

5,029,133

Interest expense

98,187

1,223,080

1,321,267

Income (loss) from operations before taxes

10,852,250

(1,209,665)

(5,855,497)

3,787,088

Equity method investment earnings, net of tax

111,666

111,666

Total assets

146,782,772

19,584,013

10,551,204

176,917,989

Capital expenditures

1,808,162

1,124,143

2,932,305

9. COMMON STOCK REPURCHASES

The Company did not repurchase any shares of its common stock during the three months ended June 2021 and repurchased a total of 1,148 shares of its common stock during the three months ended June 2020 for cash totaling approximately $0.1 million. The Company repurchased 68 shares of its common stock during the nine months ended June 2021 for cash totaling less than $0.1 million and 1,564 shares of its common stock during the nine months ended June 2020 for cash totaling approximately $0.1 million. All repurchased shares were recorded in treasury stock at cost.

10. IMPACT OF COVID-19

The Company continues to monitor a wide range of health, safety, and regulatory matters related to the COVID-19 pandemic including its impact on our business operations. In particular, ongoing supply chain disruptions at consumer packaged goods (CPG) companies have impacted product availability across all markets including the convenience distribution industry in which our company operates. Additionally, the United States is experiencing an acute workforce shortage which has created a hyper-competitive wage environment and has increased the Company’s operating costs and impacted its operations. Accordingly, ongoing and/or future disruptions to consumer demand, our supply chain, product inflation, the ability to attract employees, wage structures, or our ability to procure products or fulfill orders, could negatively impact our results from operations and financial position.

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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:

risks associated with the threat or occurrence of epidemics or pandemics (such as the recent COVID-19 pandemic or its variants) or other public health issues, including the continued health of our employees and management, the imposition of governmental orders restricting our operations and the activities of our employees, suppliers and customers and the reduced demand for our goods and services, in particular, disruptions to our supply chain or our ability to procure products or fulfill orders due to disruptions in our warehouse operations, or increased credit risk from customer credit defaults resulting from an economic downturn,

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 of 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 COVID-19 related 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,

higher commodity prices and general inflation which could impact food ingredient costs and demand for many of the products we sell,

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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,

increases in inventory carrying costs and customer credit risks,

changes in pricing strategies and/or promotional/incentive programs offered by cigarette and tobacco 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, 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.

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.

IMPACT OF COVID-19 (CORONAVIRUS) ON OUR BUSINESS

The Company continues to monitor a wide range of health, safety, and regulatory matters related to the COVID-19 pandemic including its impact on our business operations. In particular, ongoing supply chain disruptions at consumer packaged goods (CPG) companies have impacted product availability across all markets including the convenience distribution industry in which our company operates. Additionally, the United States is experiencing an acute workforce shortage which has created a hyper-competitive wage environment and has increased the Company’s operating costs and impacted its operations. Accordingly, ongoing and/or future disruptions to consumer demand, our supply chain, product inflation, the ability to attract employees, wage structures, or our ability to procure products or fulfill orders, could negatively impact our results from operations and financial position.

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, 2020, as filed with the Securities and Exchange

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Commission. There have been no significant changes with respect to these policies during the nine months ended June 2021.

THIRD FISCAL QUARTER 2021 (Q3 2021)

The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2021 and June 2020:

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 December 2020, Convenience Store News ranked us as the seventh (7th) 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 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 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 twenty 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 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 six locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. EOM has a total of eight locations in Florida.

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RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE:

    

2021

    

2020

    

Incr (Decr)

    

% Change

CONSOLIDATED:

Sales(1)

$

438,313,030

$

396,854,324

$

41,458,706

 

10.4

Cost of sales

 

412,771,324

 

375,202,044

 

37,569,280

 

10.0

Gross profit

 

25,541,706

 

21,652,280

 

3,889,426

 

18.0

Gross profit percentage

 

5.8

%  

 

5.5

%  

 

Operating expense

$

21,242,297

$

19,179,324

$

2,062,973

 

10.8

Operating income

 

4,299,409

 

2,472,956

 

1,826,453

 

73.9

Interest expense

 

329,929

 

461,581

 

(131,652)

 

(28.5)

Income tax expense

 

1,076,000

 

586,000

 

490,000

 

83.6

Net income

 

3,691,210

 

1,579,566

 

2,111,644

 

133.7

BUSINESS SEGMENTS:

Wholesale

Sales

$

426,567,261

$

385,316,005

$

41,251,256

 

10.7

Gross profit

 

21,157,711

 

17,564,000

 

3,593,711

 

20.5

Gross profit percentage

 

5.0

%  

 

4.6

%  

 

Retail

Sales

$

11,745,769

$

11,538,319

$

207,450

 

1.8

Gross profit

 

4,383,995

 

4,088,280

 

295,715

 

7.2

Gross profit percentage

 

37.3

%  

 

35.4

%  

 

(1)Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $8.3 million in Q3 2021 and $6.8 million in Q3 2020.

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 – Q3 2021 vs. Q3 2020

Sales in our Wholesale Segment increased $41.3 million during Q3 2021 as compared to Q3 2020. Significant items impacting sales during Q3 2021 included a $19.2 million increase in sales related to price increases implemented by cigarette manufacturers, a $22.9 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), partially offset by a $0.8 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.2 million during Q3 2021 as compared to Q3 2020. Of this increase, approximately $0.5 million related to higher sales volumes in our existing stores, partially offset by a $0.3 million decrease in sales volume related to the closure of a non-performing store in our Florida market. Sales in both of our business segments continue to benefit from higher consumer demand across a range of product categories.

GROSS PROFIT – Q3 2021 vs. Q3 2020

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 $3.6 million during Q3 2021 as compared to Q3 2020. Significant items impacting gross profit during Q3 2021 included a $3.4 million increase in gross profit related to higher sales volumes and promotions in our Other Products category and a $0.2 million increase in gross profit related to cigarette manufacturer price increases and the mix of cigarette cartons sold. Gross profit in our Retail Segment increased $0.3 million during Q3 2021 as compared to Q3 2020. This change was primarily related to higher sales and gross margins in our existing stores resulting from improved operational efficiencies and variations in volume and product mix between the comparative periods, partially offset by the closure of a non-performing store in our Florida market.

OPERATING EXPENSE – Q3 2021 vs. Q3 2020

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 2021 operating expenses increased $2.1 million as compared to Q3 2020. Significant items impacting operating expenses during Q3 2021 included a $1.6 million increase in employee compensation and benefit costs, a $0.3 million increase in health insurance costs, a $0.3 million increase in fuel costs, and a $0.4 million increase in other Wholesale Segment operating expenses.  These increases were partially offset by a $0.5 million decrease in our Retail Segment expenses primarily related to closure of a non-performing store in our Florida market.

INCOME TAX EXPENSE – Q3 2021 vs. Q3 2020

The change in the Q3 2021 income tax rate as compared to Q3 2020 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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RESULTS OF OPERATIONS – NINE MONTHS ENDED JUNE:

    

2021

    

2020

    

Incr (Decr)

    

% Change

CONSOLIDATED:

Sales(1)

$

1,221,571,294

$

1,094,841,943

$

126,729,351

 

11.6

Cost of sales

1,149,594,823

1,031,651,499

117,943,324

 

11.4

Gross profit

71,976,471

63,190,444

8,786,027

 

13.9

Gross profit percentage

5.9

%  

5.8

%  

Operating expenses

$

60,418,490

$

58,161,311

$

2,257,179

 

3.9

Operating income

11,557,981

5,029,133

6,528,848

 

129.8

Interest expense

1,016,902

1,321,267

(304,365)

 

(23.0)

Income tax expense

2,916,000

1,168,000

1,748,000

 

149.7

Net income

9,197,728

2,730,754

6,466,974

 

236.8

BUSINESS SEGMENTS:

Wholesale

Sales

$

1,186,372,095

$

1,060,212,478

$

126,159,617

 

11.9

Gross profit

58,804,594

51,309,852

7,494,742

 

14.6

Gross profit percentage

5.0

%  

4.8

%  

Retail

Sales

$

35,199,199

$

34,629,465

$

569,734

 

1.6

Gross profit

 

13,171,877

 

11,880,592

 

1,291,285

 

10.9

Gross profit percentage

 

37.4

%  

 

34.3

%  

(1)Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $22.4 million for the nine month period ended June 2021 and $19.8 million for the nine month period ended June 2020.

SALES – Nine months ended June 2021

Sales in our Wholesale Segment increased $126.2 million for the nine months ended June 2021 as compared to the same prior year period. Significant items impacting sales during the period included a $50.0 million increase in sales related to price increases implemented by cigarette manufacturers, a $49.6 million increase in sales related to higher sales volumes in our Other Products category, and a $26.6 million increase in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.6 million for the nine months ended June 2021 as compared to the same prior year period. Of this increase, approximately $1.2 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 two non-performing stores on a comparative basis.  Fiscal 2021 sales in both of our business segments continue to benefit from higher consumer demand across a range of product categories.

GROSS PROFIT – Nine months ended June 2021

Gross profit in our Wholesale Segment increased $7.5 million for the nine months ended June 2021 as compared to the same prior year period. Significant items impacting gross profit during the period included a $6.3 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.7 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods and a $0.5 million increase in gross profit related to the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment increased $1.3 million for the nine months ended June 2021 as compared to the same prior year period. This change was primarily related to higher sales and gross margins in our existing stores resulting from improved operational efficiencies and variations in volume and product mix between the comparative periods, partially offset by the closure of two non-performing stores on a comparative basis.

OPERATING EXPENSE – Nine months ended June 2021

Operating expenses increased $2.3 million during the nine months ended June 2021 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $3.0 million increase in employee

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compensation and benefit costs, a $0.6 million increase in health and other insurance costs, and a $0.2 million increase in other Wholesale Segment operating expenses. These increases were partially offset by a $0.4 million decrease in bad debt expense and a $1.1 million decrease in our Retail Segment operating expenses primarily related to the closure of two non-performing stores on a comparative basis.

INCOME TAX EXPENSE – Nine months ended June 2021

The change in the nine months ended June 2021 income tax rate as compared to the same prior year period was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.

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 (“BMO”) participating in the loan syndication. The Facility included the following significant terms at June 2021:

A March 2025 maturity date without a penalty for prepayment.

$110.0 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 (or equivalent rate index) plus 125 - 150 basis points depending on certain credit facility utilization measures, at the election of the Company. For this purpose, in no event shall LIBOR be less than 50 basis points.

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 was over 1.0 for the trailing twelve months.

Provides that the Company may use up to $3.5 million annually, on a collective basis, for the payment of dividends on its common stock, or other distributions or investments, provided the Company is not in default before or after such dividends, distributions or investments.  Additionally, the Company may pay dividends on its common stock, or

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make other distributions or investments in excess of $3.5 million annually provided the Company meets certain excess availability and proforma fixed charge coverage ratios and is not in default before or after such dividends, distributions or investments.

The amount available for use from 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 June 2021 was $109.5 million, of which $51.5 million was outstanding, leaving $58.0 million available.

At June 2021, 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 1.96% at June 2021. For the nine months ended June 2021, our peak borrowings under the Facility were $71.7 million, and our average borrowings and average availability under the Facility were $44.8 million and $44.0 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 Real Estate Loan with BMO which is also a participant lender on the Company’s revolving line of credit. 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 revolving credit facility, were in default. There were no such cross defaults at June 2021. 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.

Dividend Payments

The Company paid cash dividends on its common stock totaling $0.1 million and $3.2 million for the three and nine month periods ended June 30, 2021, respectively, and $0.1 million and $0.5 million for the three and nine month periods ended June 30, 2020, respectively.

Other

The Company has issued a letter of credit for $0.5 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

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 operatioins, 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 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, 2021 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

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June  2021, 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, 2020.

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.

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 Charles J. Schmaderer, Vice President, Chief Financial Officer and Secretary, 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 Charles J. Schmaderer, Vice President, Chief Financial Officer and Secretary, furnished pursuant to section 906 of the Sarbanes-Oxley Act

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 19, 2021

/s/ Christopher H. Atayan

Christopher H. Atayan,

Chief Executive Officer and Chairman

Date: July 19, 2021

/s/ Charles J. Schmaderer

Charles J. Schmaderer,

Vice President, Chief Financial Officer and Secretary

(Principal Financial and Accounting Officer)

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