AMCON DISTRIBUTING CO - Quarter Report: 2022 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, 2022


◻	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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ◻		Accelerated filer ◻		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 584,789 shares of its $.01 par value common stock outstanding as of April 15, 2022.

Table of Contents

Form 10-Q

2nd Quarter

INDEX


March 31, 2022	PAGE

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed consolidated balance sheets at March 31, 2022 (unaudited) and September 30, 2021	3

Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2022 and 2021	4

Condensed consolidated unaudited statements of shareholders’ equity for the three and six months ended March 31, 2022 and 2021	5

Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 2022 and 2021	6

Notes to condensed consolidated unaudited financial statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3. Quantitative and Qualitative Disclosures About Market Risk	23

Item 4. Controls and Procedures	23

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	25

Item 1A. Risk Factors	25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3. Defaults Upon Senior Securities	25

Item 4. Mine Safety Disclosures	25

Item 5. Other Information	25

Item 6. Exhibits	26

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

March 31, 2022 and September 30, 2021


	March		September
	2022		2021
	(Unaudited)
ASSETS
Current assets:
Cash	$	527,555	$	519,591
Accounts receivable, less allowance for doubtful accounts of $0.9 million at March 2022 and September 2021		33,556,601		35,844,163
Inventories, net		90,248,795		95,212,085
Income taxes receivable		670,234		—
Prepaid expenses and other current assets		5,476,104		4,999,125
Total current assets		130,479,289		136,574,964

Property and equipment, net		15,282,499		16,012,524
Operating lease right-of-use assets, net		16,280,827		17,846,529
Note receivable, net of current portion		3,325,000		3,325,000
Goodwill		4,436,950		4,436,950
Other intangible assets, net		500,000		500,000
Equity method investment		10,451,386		9,380,343
Other assets		414,120		334,819
Total assets	$	181,170,071	$	188,411,129

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	25,601,210	$	24,235,042
Accrued expenses		9,747,031		11,468,955
Accrued wages, salaries and bonuses		4,011,309		4,489,852
Income taxes payable		—		867,160
Current operating lease liabilities		5,458,358		5,513,390
Current maturities of long-term debt		572,100		561,202
Total current liabilities		45,390,008		47,135,601

Credit facility		35,191,547		43,650,865
Deferred income tax liability, net		2,630,427		1,531,228
Long-term operating lease liabilities		11,123,103		12,669,157
Long-term debt, less current maturities		4,765,465		5,054,265
Other long-term liabilities		36,069		757,387

Shareholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized		—		—
Common stock, $.01 par value, 3,000,000 shares authorized, 584,789 shares outstanding at March 2022 and 551,369 shares outstanding at September 2021		9,168		8,834
Additional paid-in capital		26,555,046		24,918,781
Retained earnings		86,336,525		83,552,298
Treasury stock at cost		(30,867,287)		(30,867,287)
Total shareholders’ equity		82,033,452		77,612,626
Total liabilities and shareholders’ equity	$	181,170,071	$	188,411,129

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 six months ended March 31, 2022 and 2021


	For the three months ended March				For the six months ended March
	2022		2021		2022		2021
Sales (including excise taxes of $89.1 million and $92.0 million, and $186.2 million and $192.5 million, respectively)	$	391,888,192	$	378,513,490	$	814,459,469	$	783,258,263
Cost of sales		365,211,270		355,540,704		760,849,885		736,823,498
Gross profit		26,676,922		22,972,786		53,609,584		46,434,765
Selling, general and administrative expenses		21,915,351		19,022,167		44,306,090		37,621,983
Depreciation		818,222		779,925		1,602,467		1,554,210
		22,733,573		19,802,092		45,908,557		39,176,193
Operating income		3,943,349		3,170,694		7,701,027		7,258,572

Other expense (income):
Interest expense		244,920		310,543		567,018		686,973
Other (income), net		(60,958)		(84,265)		(101,068)		(126,088)
		183,962		226,278		465,950		560,885
Income from operations before income taxes		3,759,387		2,944,416		7,235,077		6,697,687
Income tax expense		1,345,000		829,000		2,590,000		1,840,000
Equity method investment earnings, net of tax		591,795		313,492		1,362,161		648,831
Net income available to common shareholders	$	3,006,182	$	2,428,908	$	6,007,238	$	5,506,518

Basic earnings per share available to common shareholders	$	5.29	$	4.41	$	10.62	$	10.02
Diluted earnings per share available to common shareholders	$	5.19	$	4.33	$	10.33	$	9.87

Basic weighted average shares outstanding		567,889		551,369		565,694		549,729
Diluted weighted average shares outstanding		578,751		560,941		581,328		557,741

Dividends paid per common share	$	0.18	$	5.18	$	5.36	$	5.36

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 six months ended March 31, 2022 and 2021


							Additional
	Common Stock			Treasury Stock			Paid-in		Retained
	Shares	Amount		Shares	Amount		Capital		Earnings		Total
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 settlement of 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

THREE MONTHS ENDED MARCH 2022
Balance, January 1, 2022	915,009	$	9,148	(332,220)	$	(30,867,287)	$	26,999,735	$	83,438,578	$	79,580,174
Dividends on common stock, $0.18 per share	—		—	—		—		—		(108,235)		(108,235)
Compensation expense and settlement of equity-based awards	2,000		20	—		—		(444,689)		—		(444,669)
Repurchase of common stock	—		—	—		—		—		—		—
Net income	—		—	—		—		—		3,006,182		3,006,182
Balance, March 31, 2022	917,009	$	9,168	(332,220)	$	(30,867,287)	$	26,555,046	$	86,336,525	$	82,033,452


							Additional
	Common Stock			Treasury Stock			Paid-in		Retained
	Shares	Amount		Shares	Amount		Capital		Earnings		Total
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 settlement of 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

SIX MONTHS ENDED MARCH 2022
Balance, October 1, 2021	883,589	$	8,834	(332,220)	$	(30,867,287)	$	24,918,781	$	83,552,298	$	77,612,626
Dividends on common stock, $5.36 per share	—		—	—		—		—		(3,223,011)		(3,223,011)
Compensation expense and settlement of equity-based awards	33,420		334	—		—		1,636,265		—		1,636,599
Repurchase of common stock	—		—	—		—		—		—		—
Net income	—		—	—		—		—		6,007,238		6,007,238
Balance, March 31, 2022	917,009	$	9,168	(332,220)	$	(30,867,287)	$	26,555,046	$	86,336,525	$	82,033,452

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 six months ended March 31, 2022 and 2021


	March		March
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,007,238	$	5,506,518
Adjustments to reconcile net income from operations to net cash flows from (used in) operating activities:
Depreciation		1,602,467		1,554,210
Equity method investment earnings, net of tax		(1,362,161)		(648,831)
(Gain) loss on sales of property and equipment		(76,220)		(1,374)
Equity-based compensation		1,208,655		833,624
Deferred income taxes		1,099,199		48,248
Provision for losses on doubtful accounts		(3,000)		5,000
Inventory allowance		155,534		110,769
Changes in assets and liabilities:
Accounts receivable		2,290,562		1,390,027
Inventories		4,807,756		17,772,604
Prepaid and other current assets		(651,979)		(4,096,452)
Equity method investment distributions		744,118		—
Other assets		(79,301)		23,327
Accounts payable		1,465,370		429,389
Accrued expenses and accrued wages, salaries and bonuses		(700,748)		(610,589)
Other long-term liabilities		(721,318)		(169,854)
Income taxes payable and receivable		(1,990,394)		(867,112)
Net cash flows from (used in) operating activities		13,795,778		21,279,504

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(974,424)		(720,567)
Proceeds from sales of property and equipment		79,000		10,938
Principal payment received on note receivable		175,000		—
Net cash flows from (used in) investing activities		(720,424)		(709,629)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility		819,125,190		771,182,879
Repayments under revolving credit facility		(827,584,508)		(791,045,384)
Proceeds from borrowings on long-term debt		—		3,000,000
Principal payments on long-term debt		(277,902)		(237,566)
Proceeds from exercise of stock options		173,590		—
Repurchase of common stock		—		(5,738)
Dividends on common stock		(3,223,011)		(3,144,130)
Settlement and withholdings of equity-based awards		(1,280,749)		(365,022)
Net cash flows from (used in) financing activities		(13,067,390)		(20,614,961)
Net change in cash		7,964		(45,086)
Cash, beginning of period		519,591		661,195
Cash, end of period	$	527,555	$	616,109

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	582,394	$	690,134
Cash paid during the period for income taxes		3,481,196		2,658,865

Supplemental disclosure of non-cash information:
Equipment acquisitions classified in accounts payable	$	29,047	$	16,230
Issuance of common stock in connection with the vesting and exercise of equity-based awards		2,280,783		949,812

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 17,700 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In December 2021, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.

Our Wholesale Segment offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, inventory optimization and merchandising expertise, information systems, and accessing trade credit.

Our Wholesale Segment operates 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, Kellogg’s, 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 35,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. 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 seven 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, 2021, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended March 31, 2022 and March 31, 2021 have been referred to throughout this quarterly report as Q2 2022 and Q2 2021, respectively. The fiscal balance sheet dates as of March 31, 2022 and September 30, 2021 have been referred to as March 2022 and September 2021, 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.

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 $0.9 million at March 2022 and $0.8 million at September 2021. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.

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3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill at March 2022 and September 2021 was as follows:


	March		September
	2022		2021
Wholesale Segment	$	4,436,950	$	4,436,950

Other intangible assets at March 2022 and September 2021 consisted of the following:


	March		September
	2022		2021
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 2022 and September 2021. The Company performs its annual impairment testing during the fourth fiscal quarter of each year or as circumstances change or necessitate. There have been no material changes to the Company’s impairment assessments since its fiscal year ended September 2021.

4. EQUITY METHOD INVESTMENT

The Company and Chas. M. Sledd Company (“Sledd”), a West Virginia wholesale distributor serving the convenience store industry, formed and jointly own and operate Team Sledd, LLC (“Team Sledd”), a limited liability company which owns and operates Sledd’s wholesale distribution business. In conjunction with the formation of Team Sledd, 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 2022, AMCON owned approximately 49% of Team Sledd’s outstanding equity, with a carrying value of $10.5 million. For the three and six months ended March 2022, the Company recognized $0.6 million and $1.4 million, respectively, in equity investment earnings (net of income taxes) from its investment in Team Sledd. For the three and six months ended March 2021, the Company recognized $0.3 million and $0.6 million, respectively, in equity investment earnings (net of income taxes) from its investment in Team Sledd. The Company’s secured loan to Team Sledd had a carrying value of $3.3 million and $3.5 million as of March 2022 and September 2021, respectively. As of September 2021, approximately $0.2 million of the secured loan balance was recorded as a component of prepaid expenses and other current assets on the consolidated balance sheet. 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 six months ended March 2022 and March 2021 was as follows:


	For the three months ended March 2022		For the three months ended March 2021		For the six months ended March 2022		For the six months ended March 2021
Sales	$	148,066,173	$	158,459,384	$	329,483,268	$	323,027,468
Gross profit		8,219,808		7,719,918		18,037,786		15,567,308
Net income before income taxes		1,594,579		941,027		3,669,415		1,944,820
Net income attributable to AMCON, net of tax		591,795		313,492		1,362,161		648,831

5. DIVIDENDS

The Company paid cash dividends on its common stock totaling $0.1 million and $3.2 million for the three and six month periods ended March 2022, respectively, and $3.0 million and $3.1 million for the three and six month periods ended March 2021, 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 March
	2022				2021
	Basic		Diluted		Basic		Diluted
Weighted average number of common shares outstanding		567,889		567,889		551,369		551,369
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)		—		10,862		—		9,572
Weighted average number of shares outstanding		567,889		578,751		551,369		560,941
Net income available to common shareholders	$	3,006,182	$	3,006,182	$	2,428,908	$	2,428,908

Net earnings per share available to common shareholders	$	5.29	$	5.19	$	4.41	$	4.33

(1)	Diluted earnings per share calculation includes all equity-based awards deemed to be dilutive.


	For the six months ended March
	2022				2021
	Basic		Diluted		Basic		Diluted
Weighted average number of common shares outstanding		565,694		565,694		549,729		549,729
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)		—		15,634		—		8,012
Weighted average number of shares outstanding		565,694		581,328		549,729		557,741
Net income available to common shareholders	$	6,007,238	$	6,007,238	$	5,506,518	$	5,506,518

Net earnings per share available to common shareholders	$	10.62	$	10.33	$	10.02	$	9.87

(1)Diluted earnings per share calculation includes all equity-based awards 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 2022:

●

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 Facility by $25.0 million.

●

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

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●

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

●

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 Facility utilization measures, at the election of the Company. For this purpose, in no event shall LIBOR be less than zero 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 Facility. The Company’s fixed charge coverage ratio was over 1.0 for the trailing twelve months.

●

Provides that the Company may use up to $5.0 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 $5.0 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 March 2022 was $106.0 million, of which $35.2 million was outstanding, leaving $70.8 million available.

At March 2022, the revolving portion of the 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 1.76% at March 2022. For the six months ended March 2022, our peak borrowings under the Facility were $64.3 million, and our average borrowings and average availability under the Facility were $39.1 million and $56.5 million, respectively.

Cross Default and Co-Terminus Provisions

The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term loan with BMO (the “Real Estate Loan”) which is also a participant lender on the Facility. The Real Estate Loan contains cross default provisions which would cause the loan to be considered in default if the loans where BMO is a lender, including the Facility, were in default. There were no such cross defaults at March 2022. In addition, the Real Estate Loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

Other

The Company has issued a letter of credit for $0.6 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.

8. INCOME TAXES

The Company’s effective income tax rate increased during the three and six month periods ended March 2022 as compared to the respective prior year periods, primarily due to higher non-deductible compensation during the current year periods, resulting in effective income tax rates in excess of statutory rates.

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9. EQUITY-BASED INCENTIVE AWARDS

Omnibus Plans

The Company has three equity-based incentive plans, the 2014 Omnibus Incentive Plan, the 2018 Omnibus Incentive Plan, and the 2022 Omnibus Incentive Plan (collectively the “Omnibus Plans”), which provide for equity incentives to employees. Each Omnibus Plan was designed with the intent of encouraging employees to acquire a vested interest in the growth and performance of the Company. The Omnibus Plans together permit the issuance of up to 195,000 shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units, performance share awards as well as awards such as stock appreciation rights, performance units, performance shares, bonus shares, and dividend share awards payable in the form of common stock or cash. The number of shares issuable under the Omnibus Plans is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock. At March 2022, awards with respect to a total of 111,420 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plans and awards with respect to another 83,580 shares may be awarded under the Omnibus Plans.

Stock Options

The following is a summary of stock option activity during the six months ended March 2022:


		Weighted
	Number	Average
	of	Exercise
	Shares	Price
Outstanding at September 2021	22,250	$	86.76
Granted	—		—
Exercised	(22,250)		86.76
Forfeited/Expired	—		—
Outstanding at March 2022	—	$	—

10. 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 MARCH 2022
External revenues:
Cigarettes	$	256,539,579	$	—	$	—	$	256,539,579
Tobacco		66,739,280		—		—		66,739,280
Confectionery		22,671,755		—		—		22,671,755
Health food		—		12,419,296		—		12,419,296
Foodservice & other		33,518,282		—		—		33,518,282
Total external revenue		379,468,896		12,419,296		—		391,888,192
Depreciation		499,567		318,655		—		818,222
Operating income (loss)		6,303,312		746,068		(3,106,031)		3,943,349
Interest expense		53,067		—		191,853		244,920
Income (loss) from operations before taxes		6,281,362		748,572		(3,270,547)		3,759,387
Equity method investment earnings, net of tax		—		—		591,795		591,795
Total assets		149,384,369		17,563,452		14,222,250		181,170,071
Capital expenditures		466,703		187,093		—		653,796

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	Wholesale		Retail
	Segment		Segment		Other		Consolidated
THREE MONTHS ENDED MARCH 2021
External revenue:
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
SIX MONTHS ENDED MARCH 2022
External revenue:
Cigarettes	$	535,905,970	$	—	$	—	$	535,905,970
Tobacco		135,807,514		—		—		135,807,514
Confectionery		47,150,791		—		—		47,150,791
Health food		—		24,344,501		—		24,344,501
Foodservice & other		71,250,693		—		—		71,250,693
Total external revenue		790,114,968		24,344,501		—		814,459,469
Depreciation		986,332		616,135		—		1,602,467
Operating income (loss)		13,741,978		1,207,653		(7,248,604)		7,701,027
Interest expense		108,562		—		458,456		567,018
Income (loss) from operations before taxes		13,673,095		1,213,313		(7,651,331)		7,235,077
Equity method investment earnings, net of tax		—		—		1,362,161		1,362,161
Total assets		149,384,369		17,563,452		14,222,250		181,170,071
Capital expenditures		643,684		231,538		—		875,222


	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

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11. COMMON STOCK REPURCHASES

The Company did not repurchase any shares of its common stock during the three and six months ended March 2022. The Company did not repurchase any shares of its common stock during the three months ended March 2021, and repurchased 68 shares of its common stock during the six months ended March 2021 for cash totaling less than $0.1 million. All repurchased shares were recorded in treasury stock at cost.

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

BUSINESS UPDATE AND IMPACT OF COVID-19

Our businesses continue to be impacted by a number of macro-economic factors including the trailing impact of the COVID-19 pandemic. Global supply chains and product availability remain highly challenged and recent global events in Eastern Europe have only exacerbated an already difficult operating environment. These factors, combined with higher fuel costs and a highly competitive labor market have created an inflationary environment and cost pressures across our entire business.

In regard to consumer demand, since the onset of the COVID-19 pandemic both of our business segments have experienced an increase in demand and sales across a broad range of products categories. It remains unclear, however, if these demand trends will remain intact or if they will revert back to more historical levels over time, particularly as inflation begins to impact discretionary spending.

Finally, we continue to closely monitor potentially forthcoming regulations from the United States Food and Drug Administration (“FDA”) prohibiting and/or limiting the manufacture and distribution of certain menthol and flavored tobacco products. If such regulations were to be implemented, they would have a negative impact on the Company’s financial results.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect(s),” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions.

It should be understood that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:

●	risks associated with an inflationary operating environment, particularly as it relates to wages, fuel, and commodity prices which impact our operating cost structure and could impact food ingredient costs and demand for many of the products we sell,

●

risks associated with the threat or occurrence of epidemics or pandemics (such as COVID-19 or its variants) or other public health issues, including the continued health of our employees and management, the reduced demand for our goods and services or increased credit risk from customer credit defaults resulting from an economic downturn,

●	risks associated with the imposition of governmental orders restricting our operations and the operations of our suppliers and customers, in particular, disruptions to our supply chain or our ability to procure products or fulfill orders due to labor shortages in our warehouse operations,

●	risks associated with the Company’s business model, which since the onset of the COVID-19 pandemic has experienced both higher sales volumes and labor costs, and the related risk of sales returning to more historical levels without the Company being able to offset increases in its cost structure,

●

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,

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●	increasing competition and market conditions in our wholesale and retail health food businesses and any associated impact on the carrying value and any potential impairment of assets (including intangible assets) within those businesses,

●	that our repositioning strategy for our retail business will not be successful,

●	risks associated with opening new retail stores,

●	if online shopping formats such as Amazon™ continue to grow in popularity and further disrupt traditional sales channels, it may present a significant direct risk to our brick and mortar retail business and potentially to our wholesale distribution business,

●	the potential impact that ongoing, decreasing, or changing trade tariff and trade policies may have on our product costs or on consumer disposable income and demand,

●	increasing product and operational costs resulting from ongoing supply chain disruptions, an intensely competitive labor market with a limited pool of qualified workers, and higher incremental costs associated with the handling and transportation of certain product categories such as foodservice,

●	increases in state and federal excise taxes on cigarette and tobacco products and the potential impact on demand, particularly as it relates to current legislation under consideration which could significantly increase such taxes,

●

regulations, potential bans and/or litigation related to the manufacturing, distribution, and sale of certain cigarette, tobacco, and e-cigarette/vaping products by the FDA, state or local governmental agencies, or other parties, including proposed forthcoming regulations around the manufacture and distribution of certain menthol and flavored tobacco products,

●	risks associated with disruptions to our technology systems including security breaches, cyber-attacks, malware, or other methods by which our information systems could be compromised,

●	increases in inventory carrying costs and customer credit risks,

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

●	demand for the Company’s products, particularly cigarette, tobacco and e-cigarette/vaping products,

●	risks that product manufacturers may begin selling directly to convenience stores and bypass wholesale distributors,

●	changes in laws and regulations and ongoing compliance related to health care and associated insurance,

●	increasing health care costs for both the Company and consumers and its potential impact on discretionary consumer spending,

●	decreased availability of capital resources,

●	domestic regulatory and legislative risks,

●	poor weather conditions, and the adverse effects of climate change,

●	consolidation trends within the convenience store, wholesale distribution, and retail health food industries,

●	natural disasters, and domestic or political unrest, or any restrictions, regulations, or security measures implemented by governmental bodies in response to these items,

●	other risks over which the Company has little or no control, and any other factors not identified herein.

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Changes in these factors could result in significantly different results. Consequently, future results may differ from management’s expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward-looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward-looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.

CRITICAL ACCOUNTING ESTIMATES

Certain accounting estimates used in the preparation of the Company’s condensed consolidated unaudited financial statements (“financial statements”) require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2021, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the six months ended March 2022.

SECOND FISCAL QUARTER 2022 (Q2 2022)

The following discussion and analysis includes the Company’s results of operations for the three and six months ended March 2022 and March 2021:

Wholesale Segment

Retail Segment

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RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH:


	2022			2021			Incr (Decr)		% Change
CONSOLIDATED:
Sales(1)	$	391,888,192		$	378,513,490		$	13,374,702	3.5
Cost of sales		365,211,270			355,540,704			9,670,566	2.7
Gross profit		26,676,922			22,972,786			3,704,136	16.1
Gross profit percentage		6.8	%		6.1	%

Operating expense	$	22,733,573		$	19,802,092		$	2,931,481	14.8
Operating income		3,943,349			3,170,694			772,655	24.4
Interest expense		244,920			310,543			(65,623)	(21.1)
Income tax expense		1,345,000			829,000			516,000	62.2
Equity method investment earnings, net of tax		591,795			313,492			278,303	88.8
Net income available to common shareholders		3,006,182			2,428,908			577,274	23.8

BUSINESS SEGMENTS:
Wholesale
Sales	$	379,468,896		$	366,207,158		$	13,261,738	3.6
Gross profit		21,939,991			18,279,542			3,660,449	20.0
Gross profit percentage		5.8	%		5.0	%
Retail
Sales	$	12,419,296		$	12,306,332		$	112,964	0.9
Gross profit		4,736,931			4,693,244			43,687	0.9
Gross profit percentage		38.1	%		38.1	%

(1)	Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $8.2 million in Q2 2022 and $7.3 million in Q2 2021.

SALES

Changes in sales are driven by two primary components:

(i)

changes to selling prices, which are largely controlled by our product suppliers, and excise taxes imposed on cigarettes and tobacco products by various states; and

(ii)

changes in the volume and mix of products sold to our customers, either due to a change in purchasing patterns resulting from consumer preferences or the fluctuation in the comparable number of business days in our reporting period.

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SALES – Q2 2022 vs. Q2 2021

Sales in our Wholesale Segment increased $13.3 million during Q2 2022 as compared to Q2 2021. Significant items impacting sales during Q2 2022 included a $16.8 million increase in sales related to price increases implemented by cigarette manufacturers, a $12.3 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), partially offset by a $15.8 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.1 million during Q2 2022 as compared to Q2 2021. Of this increase, approximately $0.4 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 in the comparative prior year period. Sales in both of our business segments continue to benefit from high consumer demand across a range of product categories.

GROSS PROFIT – Q2 2022 vs. Q2 2021

Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.

Gross profit in our Wholesale Segment increased $3.7 million during Q2 2022 as compared to Q2 2021. Significant items impacting gross profit during Q2 2022 included a $3.3 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 net impact of cigarette manufacturer promotions and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment was even during Q2 2022 as compared to Q2 2021. Significant items impacting gross profit during Q2 2022 included a $0.1 million increase in gross margin in our existing stores which have benefited from higher sales volume and improved product mix, partially offset by a $0.1 million decrease in gross margin related to the closure of a non-performing store in our Florida market in the comparative prior year period.

OPERATING EXPENSE – Q2 2022 vs. Q2 2021

Operating expense includes selling, general and administrative expenses and depreciation. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q2 2022 operating expenses increased $2.9 million as compared to Q2 2021. Significant items impacting operating expenses during Q2 2022 included a $1.8 million increase in employee compensation and benefit costs largely due to a highly competitive labor market which has increased wage levels across all functional areas of the Company. In addition, the Company experienced a $0.5 million increase in fuel costs primarily related to higher diesel fuel prices, a $0.3 million increase in health and other insurance costs, and a $0.3 million increase in other Wholesale Segment operating expenses. Our Retail Segment expenses were even during Q2 2022 as compared to Q2 2021. Significant items impacting operating expenses included a $0.1 million decrease related to the closure of a non-performing store in our Florida market in the comparative prior year period, partially offset by a $0.1 million increase in other store operating expenses.

INCOME TAX EXPENSE – Q2 2022 vs. Q2 2021

The Company’s effective income tax rate increased during the three month period ended March 2022 as compared to the respective prior year period, primarily due to higher non-deductible compensation during the current year period, resulting in effective income tax rates in excess of statutory rates.

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RESULTS OF OPERATIONS – SIX MONTHS ENDED MARCH:


	2022			2021			Incr (Decr)		% Change
CONSOLIDATED:
Sales(1)	$	814,459,469		$	783,258,263		$	31,201,206	4.0
Cost of sales		760,849,885			736,823,498			24,026,387	3.3
Gross profit		53,609,584			46,434,765			7,174,819	15.5
Gross profit percentage		6.6	%		5.9	%

Operating expense	$	45,908,557		$	39,176,193		$	6,732,364	17.2
Operating income		7,701,027			7,258,572			442,455	6.1
Interest expense		567,018			686,973			(119,955)	(17.5)
Income tax expense		2,590,000			1,840,000			750,000	40.8
Equity method investment earnings, net of tax		1,362,161			648,831			713,330	109.9
Net income available to common shareholders		6,007,238			5,506,518			500,720	9.1

BUSINESS SEGMENTS:
Wholesale
Sales	$	790,114,968		$	759,804,833		$	30,310,135	4.0
Gross profit		44,318,794			37,646,883			6,671,911	17.7
Gross profit percentage		5.6	%		5.0	%
Retail
Sales	$	24,344,501		$	23,453,430		$	891,071	3.8
Gross profit		9,290,790			8,787,882			502,908	5.7
Gross profit percentage		38.2	%		37.5	%

(1)

Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $15.2 million for the six months ended March 2022 and $14.1 million for the six months ended March 2021.

SALES – Six months ended March 2022

Sales in our Wholesale Segment increased $30.3 million for the six months ended March 2022 as compared to the same prior year period. Significant items impacting sales during the period included a $35.7 million increase in sales related to price increases implemented by cigarette manufacturers and a $26.5 million increase in sales related to higher sales volumes in our Other Products category, partially offset by a $31.9 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.9 million for the six months ended March 2022 as compared to the same prior year period. Of this increase, approximately $1.5 million related to higher sales volumes in our existing stores, partially offset by a $0.6 million decrease in sales volume related to the closure of a non-performing store in our Florida market during the comparative prior year period. Sales in both of our business segments continue to benefit from high consumer demand across a range of product categories.

GROSS PROFIT – Six months ended March 2022

Gross profit in our Wholesale Segment increased $6.7 million for the six months ended March 2022 as compared to the same prior year period. Significant items impacting gross profit during the period included a $6.4 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, and a $0.3 million increase in gross profit related to the net impact of cigarette manufacturer promotions and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment increased $0.5 million for the six months ended March 2022 as compared to the same prior year period. This change was due to a $0.7 million increase in gross margin in our existing stores which have benefited from higher sales volume and improved product mix, partially offset by a $0.2 million decrease related to the closure of a non-performing store in our Florida market during the comparative prior year period.

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OPERATING EXPENSE – Six months ended March 2022

Operating expenses increased $6.7 million during the six months ended March 2022 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $4.8 million increase in employee compensation and benefit costs largely due to a highly competitive labor market which has increased wage levels across all functional areas of the Company. In addition, the Company experienced a $1.0 million increase in health and other insurance costs, a $0.9 million increase in fuel costs primarily related to higher diesel fuel prices, and a $0.2 million increase in other Wholesale Segment operating expenses. These increases were partially offset by a $0.2 million decrease in our Retail Segment operating expenses primarily related to the closure of a non-performing store in our Florida market during the comparative prior year period.

INCOME TAX EXPENSE – Six months ended March 2022

The Company’s effective income tax rate increased during the six month period ended March 2022 as compared to the respective prior year period, primarily due to higher non-deductible compensation during the current year period, resulting in effective income tax rates in excess of statutory rates.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company’s variability in cash flows from operating activities is dependent on the timing of inventory purchases and seasonal fluctuations. For example, periodically we have inventory “buy-in” opportunities which offer more favorable pricing terms. As a result, we may have to hold inventory for a period longer than the payment terms. This generates a cash outflow from operating activities which we expect to reverse in later periods. Additionally, during our peak time of operations in the warm weather months, we generally carry higher amounts of inventory to ensure high fill rates and customer satisfaction.

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 2022:

●	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 Facility 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 Facility for one year unless either the borrower or lender provides written notice terminating the Facility at least 90 days prior to the end of any original or renewal term of the Facility.

●	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 Facility utilization measures, at the election of the Company. For this purpose, in no event shall LIBOR be less than zero 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.

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●

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 March 2022 was $106.0 million, of which $35.2 million was outstanding, leaving $70.8 million available.

Cross Default and Co-Terminus Provisions

Dividend Payments

The Company paid cash dividends on its common stock totaling $0.1 million and $3.2 million for the three and six month periods ended March 31, 2022, respectively, and $3.0 million and $3.1 million for the three and six month periods ended March 31, 2021, respectively.

Other

The Company has issued a letter of credit for $0.6 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.

Off-Balance Sheet Arrangements

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

Liquidity Risk

The Company’s liquidity position is significantly influenced by its ability to maintain sufficient levels of working capital. For our Company and our industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.

The Company does not currently hedge its exposure to interest rate risk or fuel costs. Accordingly, significant price movements in these areas can and do impact the Company’s profitability.

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While the Company believes its liquidity position going forward will be adequate to sustain operations in both the short- and long-term, a precipitous change in operating environment could materially impact the Company’s future revenue streams as well as its ability to collect on customer accounts receivable or secure bank credit.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2022 was made under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Other

As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.

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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 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A “Risk Factors” of the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2021.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

(a) Exhibits



	3.1	Certificate of Amendment of the Restated Certificate of Incorporation of AMCON Distributing Company (incorporated by reference to Exhibit 3.1 of AMCON’s Form 8-K filed on January 20, 2022)

	3.2	Amended and Restated Bylaws of AMCON Distributing Company (incorporated by reference to Exhibit 3.2 of AMCON’s Form 8-K filed on January 20, 2022)

	10.1	AMCON Distributing Company 2022 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 of AMCON’s Form 8-K filed on January 20, 2022)

	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: April 18, 2022	/s/ Christopher H. Atayan
	Christopher H. Atayan,
	Chief Executive Officer and Chairman

Date: April 18, 2022	/s/ Charles J. Schmaderer
	Charles J. Schmaderer,
	Vice President, Chief Financial Officer and Secretary
	(Principal Financial and Accounting Officer)