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

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 March 31, 2021

◻	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 April 16, 2021.

Table of Contents

Form 10-Q

2nd Quarter

INDEX


March 31, 2021	PAGE

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed consolidated balance sheets at March 31, 2021 (unaudited) and September 30, 2020	3

Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2021 and 2020	4

Condensed consolidated unaudited statements of shareholders’ equity for the three and six months ended March 31, 2021 and 2020	5

Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 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

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

March 31, 2021 and September 30, 2020


	March		September
	2021		2020
	(Unaudited)
ASSETS
Current assets:
Cash	$	616,109	$	661,195
Accounts receivable, less allowance for doubtful accounts of $0.9 million at March 2021 and September 2020		32,883,402		34,278,429
Inventories, net		81,088,400		98,971,773
Income taxes receivable		85,705		—
Prepaid and other current assets		6,188,097		2,091,645
Total current assets		120,861,713		136,003,042

Property and equipment, net		16,670,297		17,497,274
Operating lease right-of-use assets, net		17,588,664		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		7,606,925		6,744,095
Other assets		360,459		383,786
Total assets	$	171,525,008	$	188,001,273

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	22,553,918	$	22,108,299
Accrued expenses		8,737,907		8,306,160
Accrued wages, salaries and bonuses		3,656,777		4,761,020
Income taxes payable		—		567,408
Current operating lease liabilities		5,744,143		5,607,098
Current maturities of long-term debt		516,189		516,850
Total current liabilities		41,208,934		41,866,835

Credit facility		42,109,177		61,971,682
Deferred income tax liability, net		1,854,823		1,806,575
Long-term operating lease liabilities		12,438,764		14,028,606
Long-term debt, less current maturities		5,371,889		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 March 2021 and 537,715 shares outstanding at September 2020		8,834		8,697
Additional paid-in capital		24,917,765		24,282,058
Retained earnings		73,724,722		71,362,334
Treasury stock at cost		(30,867,287)		(30,861,549)
Total shareholders’ equity		67,784,034		64,791,540
Total liabilities and shareholders’ equity	$	171,525,008	$	188,001,273

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

Table of Contents

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

for the three and six months ended March 31, 2021 and 2020


	For the three months ended March				For the six months ended March
	2021		2020		2021		2020
Sales (including excise taxes of $92.0 million and $87.5 million, and $192.5 million and $181.5 million, respectively)	$	378,513,490	$	337,886,516	$	783,258,263	$	697,987,619
Cost of sales		355,540,704		317,193,063		736,823,498		656,449,455
Gross profit		22,972,786		20,693,453		46,434,765		41,538,164
Selling, general and administrative expenses		19,022,167		18,512,890		37,621,983		37,465,626
Depreciation and amortization		779,925		790,901		1,554,210		1,516,361
		19,802,092		19,303,791		39,176,193		38,981,987
Operating income		3,170,694		1,389,662		7,258,572		2,556,177

Other expense (income):
Interest expense		310,543		387,263		686,973		859,686
Other (income), net		(84,265)		(29,920)		(126,088)		(36,697)
		226,278		357,343		560,885		822,989
Income from operations before income taxes		2,944,416		1,032,319		6,697,687		1,733,188
Income tax expense		829,000		333,000		1,840,000		582,000
Equity method investment earnings, net of tax		313,492		—		648,831		—
Net income available to common shareholders	$	2,428,908	$	699,319	$	5,506,518	$	1,151,188

Basic earnings per share available to common shareholders	$	4.41	$	1.24	$	10.02	$	2.04
Diluted earnings per share available to common shareholders	$	4.33	$	1.22	$	9.87	$	2.02

Basic weighted average shares outstanding		551,369		565,697		549,729		564,129
Diluted weighted average shares outstanding		560,941		571,852		557,741		569,856

Dividends declared and paid per common share	$	5.18	$	0.46	$	5.36	$	0.64

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

Table of Contents

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Shareholders’ Equity

for the three and six months ended March 31, 2021 and 2020


							Additional
	Common Stock			Treasury Stock			Paid-in		Retained
	Shares	Amount		Shares	Amount		Capital		Earnings		Total
THREE MONTHS ENDED MARCH 2020
Balance, January 1, 2020	869,367	$	8,692	(303,534)	$	(28,840,011)	$	24,192,954	$	66,592,637	$	61,954,272
Dividends on common stock, $0.18 per share	—		—	—		—		—		(107,056)		(107,056)
Compensation expense and issuance of stock in connection with equity-based awards	—		—	—		—		31,191		—		31,191
Repurchase of common stock	—		—	(307)		(23,643)		—		—		(23,643)
Net income	—		—	—		—		—		699,319		699,319
Balance, March 31, 2020	869,367	$	8,692	(303,841)	$	(28,863,654)	$	24,224,145	$	67,184,900	$	62,554,083

THREE MONTHS ENDED MARCH 2021
Balance, January 1, 2021	883,589	$	8,834	(332,220)	$	(30,867,287)	$	25,007,239	$	71,401,400	$	65,550,186
Dividends on common stock, $0.18 per share	—		—	—		—		—		(105,586)		(105,586)
Compensation expense and issuance of stock in connection with equity-based awards	—		—	—		—		(89,474)		—		(89,474)
Repurchase of common stock	—		—	—		—		—		—		—
Net income	—		—	—		—		—		2,428,908		2,428,908
Balance, March 31, 2021	883,589	$	8,834	(332,220)	$	(30,867,287)	$	24,917,765	$	73,724,722	$	67,784,034


							Additional
	Common Stock			Treasury Stock			Paid-in		Retained
	Shares	Amount		Shares	Amount		Capital		Earnings		Total
SIX MONTHS ENDED MARCH 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, $0.64 per share	—		—	—		—		—		(380,685)		(380,685)
Compensation expense and issuance of stock in connection with equity-based awards	13,328		131	—		—		1,058,506		—		1,058,637
Repurchase of common stock	—		—	(416)		(31,799)		—		—		(31,799)
Net income	—		—	—		—		—		1,151,188		1,151,188
Balance, March 31, 2020	869,367	$	8,692	(303,841)	$	(28,863,654)	$	24,224,145	$	67,184,900	$	62,554,083

SIX MONTHS ENDED MARCH 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, $5.36 per share	—		—	—		—		—		(3,144,130)		(3,144,130)
Compensation expense and issuance of stock in connection with equity-based awards	13,722		137	—		—		635,707		—		635,844
Repurchase of common stock	—		—	(68)		(5,738)		—		—		(5,738)
Net income	—		—	—		—		—		5,506,518		5,506,518
Balance, March 31, 2021	883,589	$	8,834	(332,220)	$	(30,867,287)	$	24,917,765	$	73,724,722	$	67,784,034

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

Table of Contents

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the six months ended March 31, 2021 and 2020


	March		March
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,506,518	$	1,151,188
Adjustments to reconcile net income from operations to net cash flows from (used in) operating activities:
Depreciation		1,554,210		1,516,361
Equity method investment earnings, net of tax		(648,831)		—
(Gain) loss on sales of property and equipment		(1,374)		33,642
Equity-based compensation		833,624		446,114
Deferred income taxes		48,248		102,163
Provision for losses on doubtful accounts		5,000		390,000
Inventory allowance		110,769		55,746
Other		—		(42,011)
Changes in assets and liabilities:
Accounts receivable		1,390,027		(3,535,875)
Inventories		17,772,604		17,375,263
Prepaid and other current assets		(4,096,452)		(100,883)
Other assets		23,327		(133,074)
Accounts payable		429,389		4,401,077
Accrued expenses and accrued wages, salaries and bonuses		(610,589)		(1,432,939)
Other long-term liabilities		(169,854)		—
Income taxes payable and receivable		(867,112)		178,013
Net cash flows from (used in) operating activities		21,279,504		20,404,785

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(720,567)		(2,245,139)
Proceeds from sales of property and equipment		10,938		—
Net cash flows from (used in) investing activities		(709,629)		(2,245,139)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility		771,182,879		680,161,101
Repayments under revolving credit facility		(791,045,384)		(697,319,735)
Proceeds from borrowings on long-term debt		3,000,000		—
Principal payments on long-term debt		(237,566)		(264,275)
Repurchase of common stock		(5,738)		(31,799)
Dividends on common stock		(3,144,130)		(380,685)
Settlement and withholdings of equity-based awards		(365,022)		—
Net cash flows from (used in) financing activities		(20,614,961)		(17,835,393)
Net change in cash		(45,086)		324,253
Cash, beginning of period		661,195		337,704
Cash, end of period	$	616,109	$	661,957

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	690,134	$	927,322
Cash paid during the period for income taxes		2,658,865		301,824

Supplemental disclosure of non-cash information:
Equipment acquisitions classified in accounts payable	$	16,230	$	6,583
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.

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 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-one 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.

Table of Contents

Our Retail Segment operates twenty-one 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 seven 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 March 31, 2021 and March 31, 2020 have been referred to throughout this quarterly report as Q2 2021 and Q2 2020, respectively. The fiscal balance sheet dates as of March 31, 2021 and September 30, 2020 have been referred to as March 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 $0.8 million at March 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.

Table of Contents

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill at March 2021 and September 2020 was as follows:


	March		September
	2021		2020
Wholesale Segment	$	4,436,950	$	4,436,950

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


	March		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 March 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 March 2021, AMCON owned approximately 44% of Team Sledd’s outstanding equity, with a carrying value of $7.6 million. For the three and six months ended March 2021, the Company recognized $0.3 million and $0.6 million, respectively, 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 March 2021. Pursuant to an operating agreement between the Company and Sledd, it is anticipated that certain membership interests in Team Sledd will be redeemed over a period of years, with such redemptions to be funded from the operations of Team Sledd. These redemptions would result in corresponding increases in the percentage of the outstanding equity of Team Sledd owned by AMCON. During April 2021, subsequent to Q2 2021, certain membership interests in Team Sledd were redeemed, which resulted in AMCON’s ownership of Team Sledd’s outstanding equity increasing to approximately 49%.

Team Sledd’s summarized unaudited financial data for the three and six months ended March 2021 was as follows:


	For the three months ended March 2021		For the six months ended March 2021
Sales	$	158,459,384	$	323,027,468
Gross profit	$	7,719,918	$	15,567,308
Net income before income taxes	$	941,027	$	1,944,820
Net income attributable to AMCON, net of tax	$	313,492	$	648,831

5. DIVIDENDS

The Company paid cash dividends on its common stock totaling $3.0 million and $3.1 million for the three and six month periods ended March 31, 2021, respectively, and $0.3 million and $0.4 million for the three and six month periods ended March 31, 2020, respectively.

Table of Contents

6. EARNINGS PER SHARE

Basic earnings per share available to common shareholders is calculated by dividing net income 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 by the sum of the weighted average common shares outstanding and the weighted average dilutive equity awards.


	For the three months ended March
	2021				2020
	Basic		Diluted		Basic		Diluted
Weighted average common shares outstanding		551,369		551,369		565,697		565,697
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)		—		9,572		—		6,155
Weighted average number of shares outstanding		551,369		560,941		565,697		571,852
Net income available to common shareholders	$	2,428,908	$	2,428,908	$	699,319	$	699,319

Net earnings per share available to common shareholders	$	4.41	$	4.33	$	1.24	$	1.22

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


	For the six months ended March
	2021				2020
	Basic		Diluted		Basic		Diluted
Weighted average common shares outstanding		549,729		549,729		564,129		564,129
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)		—		8,012		—		5,727
Weighted average number of shares outstanding		549,729		557,741		564,129		569,856
Net income available to common shareholders	$	5,506,518	$	5,506,518	$	1,151,188	$	1,151,188

Net earnings per share available to common shareholders	$	10.02	$	9.87	$	2.04	$	2.02

(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 March 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.

Table of Contents

●

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 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 March 2021 was $95.7 million, of which $42.1 million was outstanding, leaving $53.6 million available.

At March 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 1.85% at March 2021. For the six months ended March 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 $42.0 million, respectively.

LONG-TERM DEBT

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


	March 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	$	4,698,949	$	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		1,189,129		1,259,413
		5,888,078		3,125,644
Less current maturities		(516,189)		(516,850)
	$	5,371,889	$	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 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 March 2021.

Table of Contents

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, 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 MARCH 2021
External revenues:
Cigarettes	$	255,558,043	$	—	$	—	$	255,558,043
Tobacco		61,431,768		—		—		61,431,768
Confectionery		19,901,516		—		—		19,901,516
Health food		—		12,306,332		—		12,306,332
Foodservice & other		29,315,831		—		—		29,315,831
Total external revenue		366,207,158		12,306,332		—		378,513,490
Depreciation		487,004		292,921		—		779,925
Operating income (loss)		4,431,132		661,303		(1,921,741)		3,170,694
Interest expense		58,109		—		252,434		310,543
Income (loss) from operations before taxes		4,425,941		664,193		(2,145,718)		2,944,416
Equity method investment earnings, net of tax		—		—		313,492		313,492
Total assets		142,275,883		17,673,640		11,575,485		171,525,008
Capital expenditures		186,991		101,294		—		288,285


	Wholesale		Retail
	Segment		Segment		Other		Consolidated
THREE MONTHS ENDED MARCH 2020
External revenue:
Cigarettes	$	228,865,603	$	—	$	—	$	228,865,603
Tobacco		51,639,145		—		—		51,639,145
Confectionery		18,027,050		—		—		18,027,050
Health food		—		12,994,651		—		12,994,651
Foodservice & other		26,360,067		—		—		26,360,067
Total external revenue		324,891,865		12,994,651		—		337,886,516
Depreciation		443,143		347,758		—		790,901
Operating income (loss)		2,907,818		85,521		(1,603,677)		1,389,662
Interest expense		32,590		—		354,673		387,263
Income (loss) from operations before taxes		2,902,907		87,760		(1,958,348)		1,032,319
Total assets		142,552,270		20,835,266		478,777		163,866,313
Capital expenditures		439,019		349,425		—		788,444

Table of Contents


	Wholesale		Retail
	Segment		Segment		Other		Consolidated
SIX MONTHS ENDED MARCH 2021
External revenue:
Cigarettes	$	532,147,749	$	—	$	—	$	532,147,749
Tobacco		126,277,312		—		—		126,277,312
Confectionery		40,066,093		—		—		40,066,093
Health food		—		23,453,430		—		23,453,430
Foodservice & other		61,313,679		—		—		61,313,679
Total external revenue		759,804,833		23,453,430		—		783,258,263
Depreciation		959,697		594,513		—		1,554,210
Operating income (loss)		10,219,371		546,316		(3,507,115)		7,258,572
Interest expense		87,645		—		599,328		686,973
Income (loss) from operations before taxes		10,195,201		552,034		(4,049,548)		6,697,687
Equity method investment earnings, net of tax		—		—		648,831		648,831
Total assets		142,275,883		17,673,640		11,575,485		171,525,008
Capital expenditures		593,431		143,366		—		736,797


	Wholesale		Retail
	Segment		Segment		Other		Consolidated
SIX MONTHS ENDED MARCH 2020
External revenue:
Cigarettes	$	473,915,657	$	—	$	—	$	473,915,657
Tobacco		105,956,693		—		—		105,956,693
Confectionery		38,863,912		—		—		38,863,912
Health food		—		23,091,146		—		23,091,146
Foodservice & other		56,160,211		—		—		56,160,211
Total external revenue		674,896,473		23,091,146		—		697,987,619
Depreciation		875,405		640,956		—		1,516,361
Operating income (loss)		6,556,832		(1,056,785)		(2,943,870)		2,556,177
Interest expense		66,564		—		793,122		859,686
Income (loss) from operations before taxes		6,522,571		(1,052,392)		(3,736,991)		1,733,188
Total assets		142,552,270		20,835,266		478,777		163,866,313
Capital expenditures		1,232,700		949,769		—		2,182,469

9. COMMON STOCK REPURCHASES

The Company did not repurchase any shares of its common stock during the three months ended March 2021 and repurchased a total of 307 shares of its common stock during the three months ended March 2020 for cash totaling less than $0.1 million. The Company repurchased 68 and 416 shares of its common stock during the six months ended March 2021 and March 2020, respectively, for cash totaling less than $0.1 million in each respective period. All repurchased shares were recorded in treasury stock at cost.

10. IMPACT OF COVID-19

In March 2020, the World Health Organization (WHO) declared the novel strain of coronavirus (COVID-19) a global pandemic. Since that time, the Company has been designated as a critical infrastructure supplier to the Convenience Store Industry and both of its business segments have continued to operate as essential suppliers of goods and services. In response to the pandemic, the Company has undertaken a range of precautionary steps to ensure the safety of its employees, customers and suppliers, including the frequent cleaning and disinfection of workspaces, property and equipment, instituting social distancing measures, and mandating remote working environments for certain employees.

The Company continues to monitor medical, regulatory, consumer, and community-based regulations. While some COVID-19 restrictions have eased, the operating environment remains fluid and we cannot predict the long-term impact of the pandemic on our business or results of operations. Accordingly, future disruptions to consumer demand or our supply chain and/or our ability to procure products or fulfill orders, could negatively impact our financial position.

Table of Contents

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,

●	increases in operational costs, including the cost of maintaining a refrigerated trucking fleet and general business insurance costs,

●	the risks associated with a 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,

Table of Contents

●	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

Table of Contents

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

SECOND FISCAL QUARTER 2021 (Q2 2021)

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

Wholesale Segment

Retail Segment

Table of Contents

established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. EOM has a total of eight locations in Florida.

RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH:


	2021			2020			Incr (Decr)		% Change
CONSOLIDATED:
Sales(1)	$	378,513,490		$	337,886,516		$	40,626,974	12.0
Cost of sales		355,540,704			317,193,063			38,347,641	12.1
Gross profit		22,972,786			20,693,453			2,279,333	11.0
Gross profit percentage		6.1	%		6.1	%

Operating expense	$	19,802,092		$	19,303,791		$	498,301	2.6
Operating income		3,170,694			1,389,662			1,781,032	128.2
Interest expense		310,543			387,263			(76,720)	(19.8)
Income tax expense		829,000			333,000			496,000	148.9
Net income		2,428,908			699,319			1,729,589	247.3

BUSINESS SEGMENTS:
Wholesale
Sales	$	366,207,158		$	324,891,865		$	41,315,293	12.7
Gross profit		18,279,542			16,159,058			2,120,484	13.1
Gross profit percentage		5.0	%		5.0	%
Retail
Sales	$	12,306,332		$	12,994,651		$	(688,319)	(5.3)
Gross profit		4,693,244			4,534,395			158,849	3.5
Gross profit percentage		38.1	%		34.9	%

(1)	Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $7.3 million in Q2 2021 and $6.9 million in Q2 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 – Q2 2021 vs. Q2 2020

Sales in our Wholesale Segment increased $41.3 million during Q2 2021 as compared to Q2 2020. Significant items impacting sales during Q2 2021 included a $16.3 million increase in sales related to price increases implemented by cigarette manufacturers, a $10.4 million increase in sales related to the volume and mix of cigarette cartons sold, and a $14.6 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”). Sales in our Wholesale Segment continue to benefit from higher consumer demand across a range of product categories.

Sales in our Retail Segment decreased $0.7 million during Q2 2021 as compared to Q2 2020. This decrease was primarily due to lower sales volumes in our existing stores as customers restocked their home pantries near the end of Q2 2020 in response to the onset of the COVID-19 pandemic.

Table of Contents

GROSS PROFIT – Q2 2021 vs. Q2 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 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 $2.1 million during Q2 2021 as compared to Q2 2020. Significant items impacting gross profit during Q2 2021 included a $1.7 million increase in gross profit related to higher sales volumes and promotions in our Other Products category and a $0.4 million increase in gross profit related to the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment increased $0.2 million during Q2 2021 as compared to Q2 2020. This change was primarily related to higher 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 impact of overall lower sales volumes in our existing stores compared to the prior year period.

OPERATING EXPENSE – Q2 2021 vs. Q2 2020

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 Q2 2021 operating expenses increased $0.5 million as compared to Q2 2020. Significant items impacting operating expenses during Q2 2021 included a $0.7 million increase in employee compensation and benefit costs and a $0.5 million increase in health insurance costs. These increases were partially offset by a $0.4 million decrease in our Retail Segment expenses primarily related to closure of one non-performing store in our Midwest market during the prior fiscal period and reductions in other operating expenses.

INCOME TAX EXPENSE – Q2 2021 vs. Q2 2020

The change in the Q2 2021 income tax rate as compared to Q2 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.

Table of Contents

RESULTS OF OPERATIONS – SIX MONTHS ENDED MARCH:


	2021			2020			Incr (Decr)		% Change
CONSOLIDATED:
Sales(1)	$	783,258,263		$	697,987,619		$	85,270,644	12.2
Cost of sales		736,823,498			656,449,455			80,374,043	12.2
Gross profit		46,434,765			41,538,164			4,896,601	11.8
Gross profit percentage		5.9	%		6.0	%

Operating expenses	$	39,176,193		$	38,981,987		$	194,206	0.5
Operating income		7,258,572			2,556,177			4,702,395	184.0
Interest expense		686,973			859,686			(172,713)	(20.1)
Income tax expense		1,840,000			582,000			1,258,000	216.2
Net income		5,506,518			1,151,188			4,355,330	378.3

BUSINESS SEGMENTS:
Wholesale
Sales	$	759,804,833		$	674,896,473		$	84,908,360	12.6
Gross profit		37,646,883			33,745,852			3,901,031	11.6
Gross profit percentage		5.0	%		5.0	%
Retail
Sales	$	23,453,430		$	23,091,146		$	362,284	1.6
Gross profit		8,787,882			7,792,312			995,570	12.8
Gross profit percentage		37.5	%		33.7	%

(1)	Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $14.1 million for the six month period ended March 2021 and $13.0 million for the six month period ended March 2020.

SALES – Six months ended March 2021

Sales in our Wholesale Segment increased $84.9 million for the six months ended March 2021 as compared to the same prior year period. Significant items impacting sales during the period included a $30.8 million increase in sales related to price increases implemented by cigarette manufacturers, a $27.4 million increase in sales related to the volume and mix of cigarette cartons sold, and a $26.7 million increase in sales related to higher sales volumes in our Other Products category. Sales in our Retail Segment increased $0.4 million for the six months ended March 2021 as compared to the same prior year period. Of this increase, approximately $0.6 million related to higher sales volumes in our existing stores, partially offset by a $0.2 million decrease in sales volume related to the closure of one non-performing store in our Midwest market during the prior fiscal period which was nearing the end of its lease term. Fiscal 2021 sales in both of our business segments continue to benefit from higher consumer demand across a range of product categories.

GROSS PROFIT – Six months ended March 2021

Gross profit in our Wholesale Segment increased $3.9 million for the six months ended March 2021 as compared to the same prior year period. Significant items impacting gross profit during the period included a $2.9 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.5 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 $1.0 million for the six months ended March 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 one non-performing store in our Midwest market during the prior year period.

OPERATING EXPENSE – Six months ended March 2021

Operating expenses increased $0.2 million during the six months ended March 2021 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $1.3 million increase in employee

Table of Contents

compensation and benefit costs and a $0.4 million increase in health and other insurance costs. These increases were partially offset by a $0.4 million decrease in bad debt expense, a $0.3 million reduction in fuel costs, a $0.2 million decrease in other Wholesale Segment operating expenses, and a $0.6 million decrease in our Retail Segment operating expenses primarily related to closure of one non-performing store in our Midwest market during the prior fiscal period and reductions in other store operating expenses.

INCOME TAX EXPENSE – Six month ended March 2021

The change in the six months ended March 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 March 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.

●

●	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

Table of Contents

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.

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 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 March 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

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.

Table of Contents

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 March 31, 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 March 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

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)

Table of Contents

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: April 19, 2021	/s/ Christopher H. Atayan
	Christopher H. Atayan,
	Chief Executive Officer and Chairman

Date: April 19, 2021	/s/ Charles J. Schmaderer
	Charles J. Schmaderer,
	Vice President, Chief Financial Officer and Secretary
	(Principal Financial and Accounting Officer)