UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

	For the quarterly period ended ~~December 31, 2017~~June 30, 2020

☐◻	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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 ☐⌧
				~~(Do not check if a smaller reporting company)~~

Smaller reporting company ~~☒Emerging~~⌧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 ~~690,486~~564,878 shares of its $.01 par value common stock outstanding as of ~~January 15, 2018.~~July 17, 2020.

Table of Contents

Form 10-Q

~~1st~~3rd Quarter

INDEX


June 30, 2020	PAGE

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed consolidated balance sheets at ~~December 31, 2017~~June 30, 2020 (unaudited) and September 30, ~~2017~~2019	3

Condensed consolidated unaudited statements of operations for the three and nine months ended ~~December 31, 2017~~June 30, 2020 and ~~2016~~2019	4

Condensed consolidated unaudited statements of shareholders’ equity for the three and nine months ended June 30, 2020 and 2019	5

Condensed consolidated unaudited statements of cash flows for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2020 and ~~2016~~2019	5 6

Notes to condensed consolidated unaudited financial statements	6 7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3. Quantitative and Qualitative Disclosures About Market Risk	23 24

Item 4. Controls and Procedures	23 25

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	24 26

Item 1A. Risk Factors	24 26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24 26

Item 3. Defaults Upon Senior Securities	24 26

Item 4. Mine Safety Disclosures	24 26

Item 5. Other Information	24 26

Item 6. Exhibits	25 27

Table of Contents

PART I — FINANCIAL ~~INFORMATION~~

INFORMATION

Item 1.Financial ~~Statements~~ Statements

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

~~December 31, 2017~~June 30, 2020 and September 30, ~~2017~~2019


	December		September
	2017		2017
	(Unaudited)

					June		September
					2020		2019
					(Unaudited)
ASSETS
Current assets:
Cash	$	570,560	$	523,065	$	596,564	$	337,704
Accounts receivable, less allowance for doubtful accounts of $0.8 million at both December 2017 and September 2017		30,511,104		30,690,403
Accounts receivable, less allowance for doubtful accounts of $1.2 million at June 2020 and $0.9 million at September 2019						33,626,042		24,665,620
Inventories, net		49,699,948		72,909,996		82,009,219		102,343,517
Income taxes receivable						—		350,378
Prepaid and other current assets		7,982,638		4,218,811		7,259,528		7,148,459
Total current assets		88,764,250		108,342,275		123,491,353		134,845,678


Property and equipment, net		13,014,903		13,307,986		18,236,033		17,655,415
Operating lease right-of-use assets, net						19,705,044		—
Note receivable						3,500,000		—
Goodwill		6,349,827		6,349,827		4,436,950		4,436,950
Other intangible assets, net		3,461,811		3,494,311		500,000		500,000
Equity method investment						6,648,666		—
Other assets		323,643		310,488		399,943		273,579
Total assets	$	111,914,434	$	131,804,887	$	176,917,989	$	157,711,622


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,022,223	$	17,631,552	$	20,719,129	$	18,647,572
Accrued expenses		6,735,349		7,553,089		7,067,083		8,577,972
Accrued wages, salaries and bonuses		1,555,176		3,477,966		2,968,148		3,828,847
Income taxes payable		657,095		544,069		480,649		—
Current operating lease liabilities						5,486,963		—
Current maturities of long-term debt		376,478		373,645		546,657		532,747
Total current liabilities		24,346,321		29,580,321		37,268,629		31,587,138


Credit facility		12,638,221		29,037,182		56,384,002		60,376,714
Deferred income tax liability, net		1,854,151		2,336,263		1,820,511		1,823,373
Long-term operating lease liabilities						14,578,728		—
Long-term debt, less current maturities		2,552,935		2,648,179		2,713,798		3,125,644
Other long-term liabilities		35,089		34,100		167,755		42,011


Shareholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized		—		—		—		—
Common stock, $.01 par value, 3,000,000 shares authorized, 690,486 shares outstanding at December 2017 and 678,006 shares outstanding at September 2017		8,441		8,314
Common stock, $.01 par value, 3,000,000 shares authorized, 564,878 shares outstanding at June 2020 and 552,614 shares outstanding at September 2019						8,697		8,561
Additional paid-in capital		22,009,620		20,825,919		24,250,873		23,165,639
Retained earnings		62,086,133		60,935,911		68,657,375		66,414,397
Treasury stock at cost		(13,616,477)		(13,601,302)		(28,932,379)		(28,831,855)
Total shareholders’ equity		70,487,717		68,168,842		63,984,566		60,756,742
Total liabilities and shareholders' equity	$	111,914,434	$	131,804,887
Total liabilities and shareholders’ equity					$	176,917,989	$	157,711,622

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 nine months ended June 30, 2020 and 2019


	For the three months ended June				For the nine months ended June
	2020		2019		2020		2019
Sales (including excise taxes of $103.6 million and $98.0 million, and $285.1 million and $274.0 million, respectively)	$	396,854,324	$	369,981,516	$	1,094,841,943	$	1,025,431,309
Cost of sales		375,202,044		349,455,624		1,031,651,499		963,683,859
Gross profit		21,652,280		20,525,892		63,190,444		61,747,450
Selling, general and administrative expenses		18,377,641		18,513,048		55,843,266		53,861,943
Depreciation and amortization		801,683		620,142		2,318,045		1,869,378
		19,179,324		19,133,190		58,161,311		55,731,321
Operating income		2,472,956		1,392,702		5,029,133		6,016,129

Other expense (income):
Interest expense		461,581		381,469		1,321,267		1,100,995
Other (income), net		(42,525)		(15,446)		(79,222)		(55,081)
		419,056		366,023		1,242,045		1,045,914
Income from operations before income taxes		2,053,900		1,026,679		3,787,088		4,970,215
Income tax expense		586,000		361,000		1,168,000		1,536,000
Equity method investment earnings, net of tax		111,666		—		111,666		—
Net income available to common shareholders	$	1,579,566	$	665,679	$	2,730,754	$	3,434,215

Basic earnings per share available to common shareholders	$	2.79	$	1.12	$	4.84	$	5.65
Diluted earnings per share available to common shareholders	$	2.77	$	1.10	$	4.79	$	5.56

Basic weighted average shares outstanding		565,483		592,768		564,578		607,505
Diluted weighted average shares outstanding		569,902		606,278		569,873		617,887

Dividends declared and paid per common share	$	0.18	$	0.18	$	0.82	$	0.82

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~~Shareholders’ Equity

for the three and nine months ended ~~December 31, 2017~~June 30, 2020 and ~~2016~~2019

For the three months ended December


2017

2016

Sales (including excise taxes of $88.6 million and $91.0 million, respectively)

$
315,513,209

$
310,104,229

Cost of sales

297,321,447

291,788,243

Gross profit

18,191,762

18,315,986

Selling, general and administrative expenses

16,353,608

15,698,319

Depreciation and amortization

531,005

526,433

16,884,613

16,224,752

Operating income

1,307,149

2,091,234

Other expense (income):

Interest expense

202,191

217,543

Other (income), net

(5,133)

(5,773)

197,058

211,770

Income from operations before income tax expense

1,110,091

1,879,464

Income tax expense (benefit)

(370,000)

833,000

Net income available to common shareholders

$
1,480,091

$
1,046,464

Basic earnings per share available to common shareholders

$
2.15

$
1.54

Diluted earnings per share available to common shareholders

$
2.13

$
1.52

Basic weighted average shares outstanding

687,679

681,668

Diluted weighted average shares outstanding

695,950

688,676

Dividends declared and paid per common share

$
0.18

$
0.18


							Additional
	Common Stock			Treasury Stock			Paid-in		Retained
	Shares	Amount		Shares	Amount		Capital		Earnings		Total
THREE MONTHS ENDED JUNE 2019
Balance, April 1, 2019	856,039	$	8,561	(263,271)	$	(24,511,598)	$	23,148,372	$	66,203,466	$	64,848,801
Dividends on common stock, $0.18 per share	—		—	—		—		—		(111,766)		(111,766)
Compensation expense and issuance of stock in connection with equity-based awards	—		—	—		—		36,801		—		36,801
Repurchase of common stock	—		—	(1)		(141)		—		—		(141)
Net income	—		—	—		—		—		665,679		665,679
Balance, June 30, 2019	856,039	$	8,561	(263,272)	$	(24,511,739)	$	23,185,173	$	66,757,379	$	65,439,374

THREE MONTHS ENDED JUNE 2020
Balance, April 1, 2020	869,367	$	8,692	(303,841)	$	(28,863,654)	$	24,224,145	$	67,184,900	$	62,554,083
Dividends on common stock, $0.18 per share	—		—	—		—		—		(107,091)		(107,091)
Compensation expense and issuance of stock in connection with equity-based awards	500		5	—		—		26,728		—		26,733
Repurchase of common stock	—		—	(1,148)		(68,725)		—		—		(68,725)
Net income	—		—	—		—		—		1,579,566		1,579,566
Balance, June 30, 2020	869,867	$	8,697	(304,989)	$	(28,932,379)	$	24,250,873	$	68,657,375	$	63,984,566


							Additional
	Common Stock			Treasury Stock			Paid-in		Retained
	Shares	Amount		Shares	Amount		Capital		Earnings		Total
NINE MONTHS ENDED JUNE 2019
Balance, October 1, 2018	844,089	$	8,441	(228,312)	$	(21,324,752)	$	22,069,098	$	63,848,030	$	64,600,817
Dividends on common stock, $0.82 per share	—		—	—		—		—		(524,866)		(524,866)
Compensation expense and issuance of stock in connection with equity-based awards	11,950		120	—		—		1,116,075		—		1,116,195
Repurchase of common stock	—		—	(34,960)		(3,186,987)		—		—		(3,186,987)
Net income	—		—	—		—		—		3,434,215		3,434,215
Balance, June 30, 2019	856,039	$	8,561	(263,272)	$	(24,511,739)	$	23,185,173	$	66,757,379	$	65,439,374

NINE MONTHS ENDED JUNE 2020
Balance, October 1, 2019	856,039	$	8,561	(303,425)	$	(28,831,855)	$	23,165,639	$	66,414,397	$	60,756,742
Dividends on common stock, $0.82 per share	—		—	—		—		—		(487,776)		(487,776)
Compensation expense and issuance of stock in connection with equity-based awards	13,828		136	—		—		1,085,234		—		1,085,370
Repurchase of common stock	—		—	(1,564)		(100,524)		—		—		(100,524)
Net income	—		—	—		—		—		2,730,754		2,730,754
Balance, June 30, 2020	869,867	$	8,697	(304,989)	$	(28,932,379)	$	24,250,873	$	68,657,375	$	63,984,566

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 ~~three~~nine months ended ~~December 31, 2017~~June 30, 2020 and ~~2016~~2019


		December		December
		2017		2016

					June		June
					2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,480,091	$	1,046,464	$	2,730,754	$	3,434,215
Adjustments to reconcile net income from operations to net cash flows from operating activities:
Adjustments to reconcile net income from operations to net cash flows from (used in) operating activities:
Depreciation		498,505		460,183		2,318,045		1,827,711
Amortization		32,500		66,250		—		41,667
Gain on sale of property and equipment		(300)		(23,559)
Equity method investment earnings, net of income tax						(111,666)		—
Loss (gain) on sales of property and equipment						17,042		(15,376)
Equity-based compensation		334,256		459,278		765,704		1,035,128
Deferred income taxes		(482,112)		406,972		(2,862)		112,439
Provision (recovery) for losses on doubtful accounts		(3,000)		183
Provision for losses on inventory obsolescence		30,660		58,776
Other		989		319
Provision for losses on doubtful accounts						349,000		179,000
Inventory allowance						182,218		454,357

Changes in assets and liabilities:
Accounts receivable		182,299		3,605,673		(9,309,422)		(3,209,941)
Inventories		23,179,388		(1,385,731)		20,152,080		11,468,718
Prepaid and other current assets		(3,763,827)		1,969,853		(373,414)		(5,698,021)
Other assets		(13,155)		24,074		(126,364)		19,712
Accounts payable		(2,523,433)		(2,179,939)		2,040,386		2,485,721
Accrued expenses and accrued wages, salaries and bonuses		(2,011,951)		(2,370,918)		(1,424,472)		(1,460,935)
Income taxes payable		113,026		28,134
Net cash flows from operating activities		17,053,936		2,166,012

Other long-term liabilities						125,744		2,967
Income taxes payable and receivable						794,027		157,836
Net cash flows from (used in) operating activities						18,126,800		10,835,198

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(291,318)		(400,778)		(2,901,134)		(3,385,977)
Proceeds from sales of property and equipment		300		31,478		16,600		56,200
Net cash flows from investing activities		(291,018)		(369,300)

Investment in equity method investee						(6,500,000)		—
Issuance of note receivable						(3,500,000)		—
Net cash flows from (used in) investing activities						(12,884,534)		(3,329,777)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility		305,522,554		319,265,456		1,083,878,207		1,022,309,940
Repayments under revolving credit facility		(321,921,515)		(319,998,237)		(1,087,870,919)		(1,025,624,006)
Principal payments on long-term debt		(92,411)		(89,662)		(397,936)		(686,139)
Proceeds from exercise of stock options						25,750		—
Repurchase of common stock		(15,175)		(1,038,060)		(100,524)		(3,186,987)
Dividends on common stock		(129,026)		(127,713)		(487,776)		(524,866)
Withholdings on the exercise of equity-based awards		(79,850)		(82,456)
Net cash flows from financing activities		(16,715,423)		(2,070,672)
Settlement and withholdings of equity-based awards						(30,208)		—
Net cash flows from (used in) financing activities						(4,983,406)		(7,712,058)
Net change in cash		47,495		(273,960)		258,860		(206,637)
Cash, beginning of period		523,065		605,380		337,704		520,644
Cash, end of period	$	570,560	$	331,420	$	596,564	$	314,007


Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	199,423	$	223,802	$	1,387,381	$	1,140,562
Cash paid during the period for income taxes		—		397,894		376,835		1,265,725


Supplemental disclosure of non-cash information:
Equipment acquisitions classified in accounts payable		15,465		2,128	$	100,424	$	91,838
Dividends declared, not paid		200,843		194,173
Issuance of common stock in connection with the vesting and exercise of equity-based awards		1,183,091		1,262,763		990,653		1,005,792

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 ~~Southern~~Mid-South regions of the United States.

●

Our retail health food segment (“Retail Segment”) operates ~~sixteen~~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 ~~4,000~~4,100 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over ~~16,000~~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 ~~chilled~~refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In November ~~2017,~~2019, Convenience Store News ranked us as the ~~seventh (7th)~~eighth (8th) largest convenience store distributor in the United States based on annual sales.

Our ~~wholesale business~~Wholesale Segment offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, ~~optimizing~~ inventory optimization and merchandising expertise, information systems, and ~~accessing~~access to 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~~cross-dock facilities, include approximately ~~641,000~~685,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kelloggs, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.

RETAIL SEGMENT

Our Retail Segment, through our Healthy Edge, Inc. subsidiary, is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.

We operate within the natural products retail industry, which is a subset of the U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.

Table of Contents

Our Retail Segment operates ~~sixteen~~twenty-one retail health food stores as Chamberlin’s ~~Market & Café and~~Natural Foods (“Chamberlin’s”), Akin’s Natural Foods ~~Market.~~(“Akins”), and Earth Origins Market (“EOM”). These stores carry over ~~32,000~~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, ~~operates~~has a total of seven ~~stores~~locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of ~~nine~~six locations in Arkansas, Missouri, ~~Nebraska,~~ and Oklahoma. Earth Origins Market has a total of eight locations in Florida.

FINANCIAL STATEMENTS

The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included ~~herein, such as adjustments consisting of normal recurring items.~~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, ~~2017,~~2019, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended ~~December 31, 2017~~June 30, 2020 and ~~December 31, 2016~~June 30, 2019 have been referred to throughout this quarterly report as ~~Q1 2018~~Q3 2020 and ~~Q1 2017,~~Q3 2019, respectively. The fiscal balance sheet dates as of ~~December 31, 2017~~June 30, 2020 and September 30, ~~2017~~2019 have been referred to as ~~December 2017~~June 2020 and September ~~2017,~~2019, respectively.

SIGNIFICANT ACCOUNTING POLICIES

Equity Method Investment

The Company uses the equity method to account for its investment in an investee if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss (net of income taxes) of the investee is included in consolidated net earnings. Judgment regarding the level of influence over its equity method investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company evaluates its equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing its equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and future prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified. See Note 5 (Equity Method Investment) for further information relating to the Company’s equity method investment.

ACCOUNTING PRONOUNCEMENTS

Accounting ~~Pronouncements~~Pronouncement Adopted

In ~~July 2015,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2015-11, "Simplifying~~2016-02 “Leases (Topic 842)”. Accounting Standards Codification Topic (“ASC”) 842 superseded the ~~Measurement of Inventory" ("~~lease accounting requirements in “ASC 840 - Leases”. The most significant among the changes in ASU ~~2015-11"). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value~~2016-02 is the ~~estimated selling prices in~~recognition of right-of-use (“ROU”) assets and corresponding lease liabilities for leases classified as operating leases. The accounting for finance leases, which were classified as capital leases under historical GAAP, remains substantially unchanged. The lease liabilities are equal to the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. This ASU is effective for fiscal years beginning after December 15, 2016 (Fiscal 2018 for the Company). The amendments should be applied prospectively with earlier application permitted aspresent value of the ~~beginning~~remaining lease payments while the ROU asset is determined based on the amount of ~~an interim or annual reporting period.~~the lease liability, plus initial direct costs incurred less lease incentives. The Company elected the optional transition method to apply ASU 2016-02 prospectively at adoption during the Company’s first quarter of fiscal year 2020 (“Q1 2020”), which resulted in recognition of ROU assets of approximately $21.9 million, lease

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liabilities of $22.2 million, and a decrease of deferred rent recorded under ASC 840 of $0.3 million. The adoption of ~~this ASU~~ASC 842 did not have a material effect on the Company’s consolidated statements of operations or cash flows. Comparative periods presented in the financial statements prior to Q1 2020 continue to be presented under ASC 840. The adoption of ASC 842 did not have a material impact on ~~our consolidated financial statements.~~the Company’s debt-covenant compliance under its revolving credit facility.

In ~~March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvements~~accordance with an accounting policy election under ASC 842, the Company does not recognize assets or liabilities for leases with an initial term of twelve months or less as these short-term lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected the package of practical expedients within ASC 842 that allows an entity to ~~Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of how companies~~not reassess, prior to the effective date, (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases. The Company also elected the practical expedient to account for ~~share-based compensation, including~~non-lease components as part of the ~~accounting~~lease for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 (Fiscal 2018 for the Company) and early adoption is permitted. The adoption of this ASU did not have a material impact on our consolidated financial statements.all asset classes.

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New Accounting Pronouncements

In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This ASU and related amendments supersedes the revenue recognition requirements in "Accounting Standard Codification 605 - Revenue Recognition" and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2017 (Fiscal 2019 for the Company), and for interim periods within that fiscal year. The Company is in the data aggregation and quantification phase of its review of this new standard, and is working to assess the impact and our approach towards adopting this ASU.

In February 2016, FASB issued ASU No. 2016-02 "Leases” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (Fiscal 2020 for the Company), and for interim periods within that fiscal year. The Company is currently evaluating this ASU and its potential impact on our consolidated financial statements including the potential capitalization of all operating leases on the Company’s balance sheet.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ~~(“ASU 2016-13”)~~, 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, ~~2019~~2022 (fiscal ~~2021~~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 ~~January 2017,~~March 2020, the FASB issued ASU No. ~~2017-04, “Intangibles - Goodwill and Other~~2020-04, “Reference Rate Reform (Topic ~~350)~~848): ~~Simplifying~~Facilitation of the ~~Test~~Effects of Reference Rate Reform on Financial Reporting.” The amendments in this update provide optional guidance for ~~Goodwill Impairment” (“ASU 2017-04”). The new guidance simplifies~~a limited period of time to ease the ~~subsequent measurement of goodwill by eliminating Step 2~~potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from the ~~goodwill impairment test. ASU 2017-04 requires goodwill impairment~~London Interbank Offered Rate (LIBOR) and other interbank offered rates to ~~be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. ASU 2017-04 requires prospective application and is~~alternative reference rates. The amendments in this update were effective upon issuance for ~~annual periods beginning after~~all entities through December ~~15, 2019 (Fiscal 2021 for the Company) with early adoption permitted.~~31, 2022. The Company is currently ~~evaluating~~reviewing this ASU and its potential impact on our consolidated financial statements.

2. INVENTORIES

~~At December 2017 and September 2017, inventories~~Inventories consisted of finished goods and are stated at the lower of cost (determined on a FIFO basis for our wholesale segment and using the retail method for our retail segment) or net realizable value. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately ~~$0.8~~$1.2 million at ~~both December 2017~~June 2020 and $1.0 million at September ~~2017.~~2019. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.

3. LEASES

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

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

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borrowing rates based on information available at the lease commencement date in calculating the present value of lease payments.

Leases consist of the following:


Assets	Classification	June 2020
Operating	Operating lease right-of-use assets	$	19,705,044

Liabilities
Current:
Operating	Operating lease liabilities	$	5,486,963
Non-current:
Operating	Long-term operating lease liabilities		14,578,728
Total lease liabilities		$	20,065,691

The components of lease costs were as follows:



	Total
THREE MONTHS ENDED JUNE 2020
Operating lease cost	$	1,674,003
Short-term lease cost		79,334
Variable lease cost		82,092
Net lease cost	$	1,835,429



	Total
NINE MONTHS ENDED JUNE 2020
Operating lease cost	$	5,005,627
Short-term lease cost		246,776
Variable lease cost		251,319
Net lease cost	$	5,503,722

Maturities of lease liabilities as of June 2020 were as follows:


	Operating Leases
2020	$	6,177,926
2021		5,223,564
2022		4,031,833
2023		3,200,980
2024		1,878,839
2025 and thereafter		1,345,755
Total lease payments		21,858,897
Less: interest		(1,793,206)
Present value of lease liabilities	$	20,065,691

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


Lease Term	June 2020
Weighted-average remaining lease term (years):
Operating	4.4
Discount Rate
Weighted-average discount rate:
Operating	4.04	%

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


	For the nine months ended June 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used by operating leases	$	4,949,672
Lease liabilities arising from obtaining new ROU assets:
Operating leases	$	2,188,685

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


	Operating
Fiscal Year Ending	Leases
2020	$	6,468,837
2021		5,418,617
2022		4,299,261
2023		3,216,671
2024		2,456,810
Thereafter		2,387,618
Total minimum lease payments	$	24,247,814

4. GOODWILL AND OTHER INTANGIBLE ASSETS

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


	December		September
	2017		2017

					June		September
					2020		2019
Wholesale Segment	$	4,436,950	$	4,436,950	$	4,436,950	$	4,436,950
Retail Segment		1,912,877		1,912,877
	$	6,349,827	$	6,349,827

Other intangible assets of the Company consisted of the following:


	December		September
	2017		2017

					June		September
					2020		2019
Trademarks and tradenames (Retail Segment)	$	3,373,269	$	3,373,269	$	500,000	$	500,000
Customer relationships (Wholesale Segment) (less accumulated amortization of approximately $2.0 million at both December 2017 and September 2017)		88,542		121,042
	$	3,461,811	$	3,494,311

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. ~~At December 2017, identifiable intangible assets considered~~Goodwill recorded on the Company’s consolidated balance sheet represents amounts allocated to its wholesale reporting unit which totaled $4.4 million at both June 2020 and September 2019. The Company performs its annual impairment testing during the fourth fiscal quarter of each year or as circumstances change or necessitate. There have finite lives were represented by customer relationships which are being amortized over eight years. These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted.been no material changes to the Company’s impairment assessments since its fiscal year ended September 2019.

~~Estimated future amortization expense related~~

5. EQUITY METHOD INVESTMENT

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

At June 2020, AMCON owned approximately 44% of Team Sledd’s outstanding equity, with ~~finite lives is~~a carrying value of $6.6 million. For the three months ended June 2020, the Company recognized $0.1 million in equity in earnings (net of income

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taxes) from its investment in Team Sledd. The Company’s secured loan to Team Sledd had a carrying value of $3.5 million as ~~follows at December 2017:~~of June 2020.

December

2017
Fiscal 2018 (1)

$
46,875

Fiscal 2019

41,667

$
88,542

~~(1)~~

~~Represents amortization for the remaining nine months of Fiscal 2018.~~

4.6. DIVIDENDS

The Company paid cash dividends on its common stock totaling $0.1 million ~~in each of~~and $0.5 million for the three and nine month periods ended ~~December 2017~~June 2020, respectively, and ~~December 2016.~~$0.1 million and $0.5 million for the three and nine month periods ended June 2019, respectively.

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5.7. EARNINGS PER SHARE

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


	For the three months ended December
	2017				2016
	Basic		Diluted		Basic		Diluted

									For the three months ended June
									2020				2019
									Basic		Diluted		Basic		Diluted
Weighted average common shares outstanding		687,679		687,679		681,668		681,668		565,483		565,483		592,768		592,768
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1)		—		8,271		—		7,008
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)										—		4,419		—		13,510
Weighted average number of shares outstanding		687,679		695,950		681,668		688,676		565,483		569,902		592,768		606,278
Net income available to common shareholders	$	1,480,091	$	1,480,091	$	1,046,464	$	1,046,464	$	1,579,566	$	1,579,566	$	665,679	$	665,679


Net earnings per share available to common shareholders	$	2.15	$	2.13	$	1.54	$	1.52	$	2.79	$	2.77	$	1.12	$	1.10

(1)

~~(1)~~

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


	For the nine months ended June
	2020				2019
	Basic		Diluted		Basic		Diluted
Weighted average common shares outstanding		564,578		564,578		607,505		607,505
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)		—		5,295		—		10,382
Weighted average number of shares outstanding		564,578		569,873		607,505		617,887
Net income available to common shareholders	$	2,730,754	$	2,730,754	$	3,434,215	$	3,434,215

Net earnings per share available to common shareholders	$	4.84	$	4.79	$	5.65	$	5.56

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

8. DEBT

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

The Facility included the following significant terms at ~~December 2017:~~June 2020:

●

A ~~November 2022~~March 2025 maturity date without a penalty for prepayment.

●

$~~70.0~~110.0 million revolving credit limit.

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●

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 successor rate index) plus 125 - 150 basis points depending on certain credit facility utilization measures, at the election of the Company.

In no event shall LIBOR be less than 100 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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●

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 ~~availability has not fallen below 10% of the maximum loan limit and the Company’s~~ fixed charge coverage ratio iswas over 1.0 for the trailing twelve months.

●

Provides that the Company may ~~pay~~use up to ~~$2.0~~$3.5 million annually, on a collective basis, for the payment of dividends on its ~~capital~~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 ~~the dividend.~~

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 June 2020 was $95.0 million, of which $56.4 million was outstanding, leaving $38.6 million available.

At June 2020, 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 2.42% at June 2020. For the nine months ended June 2020, our peak borrowings under the Facility were $72.7 million, and our average borrowings and average availability under the Facility were $50.1 million and $30.8 million, respectively.

Cross Default and Co-Terminus Provisions

The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term loan with BMO Harris Bank (the “Real Estate Loan”) which is also a participant lender on the Company’s revolving line of credit. The Real Estate Loan contains cross default provisions which cause itthe loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, isare in default. There were no such cross defaults at ~~December 2017.~~June 2020. 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

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

~~7. EQUITY-BASED INCENTIVE AWARDS~~

~~Omnibus Plan~~

The Company has two equity-based incentive plans, the 2007 Omnibus Incentive Plan and 2014 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 225,000 shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units, performance share awards as well as awards such as stock appreciation rights, performance units, performance shares, bonus shares, and dividend share awards payable in the form of common stock or cash. The number of shares issuable under the Omnibus Plans is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock. At December 2017, awards with respect to a total of 208,815 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plans and awards with respect to another 16,185 shares may be awarded under the Omnibus Plans.

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~~Stock Options~~

The Company issued 6,000 incentive stock options during both Q1 2018 and Q1 2017 to various employees pursuant to the provisions of the Company’s 2014 Omnibus Plan. The stock options issued by the Company expire ten years from the grant date and include a five year graded annual vesting schedule. The awards had an estimated grant date fair value of approximately $0.2 million in Q1 2018 and $0.1 million in Q1 2017 using the Black‑Scholes option pricing model. The following assumptions were used in connection with the Black‑Scholes option pricing calculation as it relates to the Q1 2018 and Q1 2017 incentive stock option awards:

Stock Option

Stock Option

Pricing

Pricing

Assumptions

Assumptions

2018

2017
Risk-free interest rate

2.41
%

2.12
%
Dividend yield

0.8
%

0.6
%
Expected volatility

33.00
%

22.40
%
Expected life in years

6

6

~~The following is a summary of stock option activity during Q1 2018:~~

Weighted

Number

Average

of

Exercise

Shares

Price

Outstanding at September 2017

28,300

$
74.75

Granted

6,000

90.50

Exercised

—

—

Forfeited/Expired

—

—

Outstanding at December  2017

34,300

$
77.50

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~~Restricted Stock Units~~

At December 2017, the Compensation Committee of the Board of Directors had authorized and approved the following restricted stock unit awards to members of the Company’s management team pursuant to the provisions of the Company’s Omnibus Plans:

Restricted
Stock Units(1)

Restricted
Stock Units(2)

Restricted
Stock Units(3)

Restricted
Stock Units(4)
Date of award:

October 2013

October 2015

October 2016

October 2017
Original number of awards issued:

17,600

13,250

13,000

13,000
Service period:

36 - 60 months

36 - 60 months

36 months

36 months
Estimated fair value of award at grant date:

$
1,486,000

$
1,112,000

$
1,191,000

$
1,177,000
Non-vested awards outstanding at
December 31, 2017:

660

4,484

8,667

13,000
Fair value of non-vested awards at
December 31, 2017 of approximately:

$
65,000

$
439,000

$
848,000

$
1,272,000

~~(1)16,940 restricted stock units were vested as of December 2017. The remaining 660 restricted stock units will vest in October 2018.~~

(2)8,766 of the restricted stock units were vested as of December 2017. 4,334 restricted stock units will vest in October 2018. The remaining 150 restricted stock units will vest in equal annual amounts in October 2018 through October 2020.

~~(3)4,333 restricted stock units were vested as of December 2017. 4,333 restricted stock units will vest in October 2018 and 4,334 will vest in October 2019.~~

~~(4)The 13,000 restricted stock units will vest in equal amounts in October 2018, October 2019, and October 2020.~~

There is no direct cost to the recipients of the restricted stock units, except for any applicable taxes. The restricted stock units are subject to the customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock. All cash dividends and/or distributions payable to restricted stock recipients will be held in escrow until all the conditions of vesting have been met.

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

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~~The following summarizes restricted stock unit activity under the Omnibus Plans during Q1 2018:~~

Number

Weighted

of

Average


Shares

Fair Value

Nonvested restricted stocks units at September 2017

27,521

$
92.25

Granted

13,000

90.50

Vested

(13,710)

90.97

Expired

—

—

Nonvested restricted stocks units at December  2017

26,811

$
97.85

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

Net income before income taxes included compensation expense of approximately $0.3 million and $0.5 million during Q1 2018 and Q1 2017, respectively, related to the amortization of all equity-based compensation awards. Total unamortized compensation expense related to these awards at December 2017 and September 2017 was approximately $2.7 million and $1.5 million, respectively.

~~8. INCOME TAXES~~

~~The Company’s Q1 2018 results of operations included~~ ~~the impact of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”), which was signed into law on December 22, 2017.~~ Among numerous provisions included in the new law was the reduction of the corporate federal income tax rate from 35% to 21%. In Q1 2018, the Company applied the newly enacted corporate federal income tax rate of 21% resulting in approximately a $0.9 million income tax benefit which is reflected in the Company’s Q1 2018 Statement Of Operations. This tax benefit was primarily the result of applying the new lower income tax rates to the Company’s net long term deferred tax liabilities recorded on its Consolidated Balance Sheet. The final impact of Tax Reform may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions Company may take as a result of Tax Reform.

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9. BUSINESS SEGMENTS

The Company has two reportable business segments: the wholesale distribution of consumer products and the retail sale of health and natural food products. The retail health food stores’ operations are aggregated to comprise the Retail Segment because such operations have similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products and the methods used to sell the products. Included in the “Other” column are intercompany eliminations, and assets held and charges incurred 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 DECEMBER 2017

									Wholesale		Retail
									Segment		Segment		Other		Consolidated
THREE MONTHS ENDED JUNE 2020
External revenues:
Cigarettes									$	276,348,474	$	—	$	—	$	276,348,474
Tobacco										59,487,110		—		—		59,487,110
Confectionery										20,614,034		—		—		20,614,034
Health food										—		11,538,319		—		11,538,319
Foodservice & other										28,866,387		—		—		28,866,387
Total external revenue										385,316,005		11,538,319		—		396,854,324
Depreciation										452,025		349,658		—		801,683
Amortization										—		—		—		—
Operating income (loss)										4,350,347		(159,706)		(1,717,685)		2,472,956
Interest expense										31,623		—		429,958		461,581
Income (loss) from operations before taxes										4,329,679		(157,273)		(2,118,506)		2,053,900
Equity method investment earnings, net of tax										—		—		111,666		111,666
Total assets										146,782,772		19,584,013		10,551,204		176,917,989
Capital expenditures										575,462		174,374		—		749,836

THREE MONTHS ENDED JUNE 2019
External revenue:
Cigarettes	$	223,265,578	$	—	$	—	$	223,265,578	$	255,049,572	$	—	$	—	$	255,049,572
Tobacco		41,641,678		—		—		41,641,678		52,014,713		—		—		52,014,713
Confectionery		18,516,318		—		—		18,516,318		22,541,448		—		—		22,541,448
Health food		—		6,289,897		—		6,289,897		—		11,037,533		—		11,037,533
Foodservice & other		25,799,738		—		—		25,799,738		29,338,250		—		—		29,338,250
Total external revenue		309,223,312		6,289,897		—		315,513,209		358,943,983		11,037,533		—		369,981,516
Depreciation		310,485		188,020		—		498,505		350,701		259,024		—		609,725
Amortization		32,500		—		—		32,500		10,417		—		—		10,417
Operating income (loss)		3,188,983		(472,981)		(1,408,853)		1,307,149		3,592,787		(702,888)		(1,497,197)		1,392,702
Interest expense		23,708		—		178,483		202,191		36,240		—		345,229		381,469
Income (loss) from operations before taxes		3,167,932		(470,505)		(1,587,336)		1,110,091		3,569,182		(700,076)		(1,842,427)		1,026,679
Total assets		97,487,611		14,302,363		124,460		111,914,434		120,567,974		17,187,420		186,822		137,942,216
Capital expenditures		54,646		236,672		—		291,318		757,993		347,790		—		1,105,783

THREE MONTHS ENDED DECEMBER 2016
External revenue:
Cigarettes	$	221,769,023	$	—	$	—	$	221,769,023
Tobacco		38,685,826		—		—		38,685,826
Confectionery		18,600,447		—		—		18,600,447
Health food		—		6,239,304		—		6,239,304
Foodservice & other		24,809,629		—		—		24,809,629
Total external revenue		303,864,925		6,239,304		—		310,104,229
Depreciation		342,674		117,509		—		460,183
Amortization		66,250		—		—		66,250
Operating income (loss)		3,968,792		(298,486)		(1,579,072)		2,091,234
Interest expense		26,393		—		191,150		217,543
Income (loss) from operations before taxes		3,943,902		(294,215)		(1,770,223)		1,879,464
Total assets		93,912,144		13,038,299		85,364		107,035,807
Capital expenditures		166,775		234,003		—		400,778

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	Wholesale		Retail
	Segment		Segment		Other		Consolidated
NINE MONTHS ENDED JUNE 2020
External revenue:
Cigarettes	$	750,264,131	$	—	$	—	$	750,264,131
Tobacco		165,443,803		—		—		165,443,803
Confectionery		59,477,946		—		—		59,477,946
Health food		—		34,629,465		—		34,629,465
Foodservice & other		85,026,598		—		—		85,026,598
Total external revenue		1,060,212,478		34,629,465		—		1,094,841,943
Depreciation		1,327,431		990,614		—		2,318,045
Amortization		—		—		—		—
Operating income (loss)		10,907,179		(1,216,491)		(4,661,555)		5,029,133
Interest expense		98,187		—		1,223,080		1,321,267
Income (loss) from operations before taxes		10,852,250		(1,209,665)		(5,855,497)		3,787,088
Equity method investment earnings, net of tax		—		—		111,666		111,666
Total assets		146,782,772		19,584,013		10,551,204		176,917,989
Capital expenditures		1,808,162		1,124,143		—		2,932,305

NINE MONTHS ENDED JUNE 2019
External revenue:
Cigarettes	$	704,983,203	$	—	$	—	$	704,983,203
Tobacco		144,875,098		—		—		144,875,098
Confectionery		60,352,104		—		—		60,352,104
Health food		—		34,001,611		—		34,001,611
Foodservice & other		81,219,293		—		—		81,219,293
Total external revenue		991,429,698		34,001,611		—		1,025,431,309
Depreciation		1,093,005		734,706		—		1,827,711
Amortization		41,667		—		—		41,667
Operating income (loss)		11,093,779		(489,288)		(4,588,362)		6,016,129
Interest expense		110,837		—		990,158		1,100,995
Income (loss) from operations before taxes		11,030,865		(482,128)		(5,578,522)		4,970,215
Total assets		120,567,974		17,187,420		186,822		137,942,216
Capital expenditures		2,366,666		1,109,896		—		3,476,562

10. COMMON STOCK ~~REPURCHASE~~REPURCHASES

The Company repurchased a total of ~~171~~1,148 and ~~11,104~~1,564 shares of its common stock during ~~Q1 2018~~the three and ~~Q1 2017,~~nine months ended June 2020, respectively, for cash totaling approximately $0.1 million ~~and $1.0 million, respectively.~~in each respective period. For the nine months ended June 2019, the Company repurchased a total of 34,960 shares of its common stock for approximately $3.2 million. All repurchased shares ~~are~~were recorded in treasury stock at cost.

11. IMPACT OF COVID-19

In March 2020, the World Health Organization (WHO) declared the novel strain of coronavirus (COVID-19) a global pandemic. The Company is designated as a critical infrastructure supplier to the Convenience Store Industry. Both of the Company’s business segments have continued to operate during the pandemic as essential suppliers of goods and services and the Company has taken certain proactive and precautionary steps to ensure the safety of its employees, customers and suppliers, including 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 and consumer developments as more communities reopen, however, we cannot predict the long-term effects on our business, including our financial position or results of operations, if governmental restrictions such as Stay-At-Home orders or other such directives continue or are reinstated for a prolonged period of time and materially disrupt our supply chain or our ability to procure products or fulfill orders due to disruptions in our warehouse operations.

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, ~~company~~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,~~“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.

~~You~~It should ~~understand~~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 or coronavirus outbreak) 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,

●

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~~assets) within those businesses,

●

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

●	·risks associated with opening new retail stores,

●

risks associated with the acquisition of assets or new businesses 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,

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

●	·the potential impact of ongoing trade tariffs may have on our product costs or on consumer disposable income and demand,

●

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

●	·the risks associated with a 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,

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●

~~regulation of cigarette, tobacco, and e-cigarette products by the FDA, in addition to existing state and federal~~ regulations, ~~by other agencies,~~

potential bans and/or ~~restrictions imposed by~~litigation related to the ~~FDA, states, or local municipalities on the manufacture,~~manufacturing, distribution, and sale of certain cigarette, tobacco, and ~~tobacco~~e-cigarette/vaping products

by the United States Food and Drug Administration (“FDA”), state or local governmental agencies, or other parties,

●

increases in manufacturer prices,

●

increases in inventory carrying costs and customer credit ~~risk,~~

risks,

●

changes in promotional and incentive programs offered by manufacturers,

●

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

●

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

●

~~risks associated with opening new retail stores,~~

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 ~~the~~its potential impact on discretionary consumer spending,

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●

~~the ongoing trend of higher health care costs in our business which has impacted profitability,~~

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,

●

the impact on the Company’s financial statements as it relates to the accounting treatment and disclosure requirements under the new tax law (Tax Cut and Jobs Act) and the issuance of any new interpretive guidance,

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

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

As of June 2020, most retailers served by the Company’s wholesale segment had reopened and been experiencing improved store traffic and sales attributable to consumers re-emerging from Stay-At-Home orders, however the sales mix, including foodservice sales, remain challenging. Our retail health food segment did experience an increase in customer traffic during Q3 2020 related to home-pantry building in response to the COVID-19 pandemic and the closure of competitors.

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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, ~~2017,~~2019, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during ~~our fiscal quarter~~the nine months ended ~~December 2017.~~June 2020 other than the adoption of ASC 842 which did have a material impact on the Company’s consolidated balance sheet.

~~FIRST~~THIRD FISCAL QUARTER ~~2017 (Q1 2018)~~2020 (Q3 2020)

The following discussion and analysis includes the Company’s results of operations for the three and nine months ended ~~December 2017~~June 2020 and ~~December 2016:~~June 2019:

Wholesale Segment

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Retail Segment

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~~Business Update - Wholesale Segment~~

A number of trends continue to impact the convenience store industry. First, the long term demand trend for cigarettes continues to decline as fewer individuals smoke, in part because of the impact of higher excise taxes. Most recently, one of the world’s largest tobacco product manufacturers (Philip Morris), announced a long term strategic plan to primarily focus on alternative smoking products (i.e. vaporized tobacco delivery systems) and to reduce its long term reliance on the sale of cigarettes. Secondly, the lines between convenience stores and other retail formats continues to blur as quick serve restaurants (“QSRs”), drugstores, dollar stores, and smaller footprint grocery stores all add competing products and services.

In response, the convenience store industry is migrating towards higher end offerings such as foodservice and is increasingly using digital technologies to help run and promote their businesses. Long term, we believe these trends benefit larger distributors such as our Company which have built robust foodservice and technology platforms. We also believe these trends will result in additional consolidation amongst industry distributors which may provide the Company with opportunities to expand its geographic footprint via strategic acquisitions.

Forward looking, we remain optimistic about the opportunities available to the Company. While retailers across all consumer sectors face a challenging operating environment, many of the trends impacting independent convenience stores operators will likely only heighten the demand for the services offered by the most progressive distributors.

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~~Business Update - Retail Segment~~

The food retailing sector continues to undergo significant change, creating a highly competitive operating environment. Specific to the health and natural products sector, conventional grocery stores and mass merchants such as Krogers, Albertsons, and Costco have all aggressively moved into certain product lines traditionally dominated by health food retailers. Additionally, both regional and national health food stores such as Whole Foods Market (now owned by AMAZON), Trader Joe’s, Sprouts Farmers Market, Natural Grocers, Vitamin Shoppe, Lucky’s Market, and Fresh Thyme Farmers Market continue to expand.

In response to this operating environment, we previously disclosed as long term strategic plan to reposition our retail business. The core of this repositioning strategy is focused on four functional areas: 1) targeted closure of non-performing stores, 2) selectively remodeling existing stores and adding new stores which incorporate modern design themes and convenience shopping attributes, 3) the implementation of a comprehensive program to optimize our merchandising strategy, and 4) the use of a new multi-channel branding and marketing program.

An important long term element of our turnaround plan will be the deployment of a flexible store operating model for each location. As consumer shopping habits and preferences change, we are also exploring a range of programs and initiatives to enhance the level of engagement with customers.

In connection with the aforementioned strategic plan, during Q1 2018 we opened one new store in our Florida market. We also anticipate completing two additional remodeling projects in existing stores during fiscal 2018.

RESULTS OF OPERATIONS – THREE MONTHS ENDED ~~DECEMBER 2017:~~JUNE 2020:


	For the three months ended December
	2017			2016			Incr (Decr)		% Change

										2020			2019			Incr (Decr)		% Change
CONSOLIDATED:
Sales(1)	$	315,513,209		$	310,104,229		$	5,408,980	1.7	$	396,854,324		$	369,981,516		$	26,872,808	7.3
Cost of sales		297,321,447			291,788,243			5,533,204	1.9		375,202,044			349,455,624			25,746,420	7.4
Gross profit		18,191,762			18,315,986			(124,224)	(0.7)		21,652,280			20,525,892			1,126,388	5.5
Gross profit percentage		5.8	%		5.9	%					5.5	%		5.5	%


Operating expense	$	16,884,613		$	16,224,752		$	659,861	4.1	$	19,179,324		$	19,133,190		$	46,134	0.2
Operating income		1,307,149			2,091,234			(784,085)	(37.5)		2,472,956			1,392,702			1,080,254	77.6
Interest expense		202,191			217,543			(15,352)	(7.1)		461,581			381,469			80,112	21.0
Income tax expense (benefit)		(370,000)			833,000			(1,203,000)	(144.4)
Income tax expense											586,000			361,000			225,000	62.3
Net income		1,480,091			1,046,464			433,627	41.4		1,579,566			665,679			913,887	137.3


BUSINESS SEGMENTS:
Wholesale
Sales	$	309,223,312		$	303,864,925		$	5,358,387	1.8	$	385,316,005		$	358,943,983		$	26,372,022	7.3
Gross profit		15,478,295			15,568,583			(90,288)	(0.6)		17,564,000			16,609,828			954,172	5.7
Gross profit percentage		5.0	%		5.1	%					4.6	%		4.6	%
Retail
Sales	$	6,289,897		$	6,239,304		$	50,593	0.8	$	11,538,319		$	11,037,533		$	500,786	4.5
Gross profit		2,713,467			2,747,403			(33,936)	(1.2)		4,088,280			3,916,064			172,216	4.4
Gross profit percentage		43.1	%		44.0	%					35.4	%		35.5	%

(1)

~~(1)~~

Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled ~~$5.6~~$6.8 million in ~~Q1 2018~~Q3 2020 and ~~$5.5~~$6.7 million in ~~Q1 2017.~~

Q3 2019.

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SALES

Changes in sales are driven by two primary components:

(i)

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

(ii)

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

SALES – ~~Q1 2018~~Q3 2020 vs. ~~Q1 2017~~Q3 2019

Sales in our Wholesale Segment increased ~~$5.4~~$26.4 million during ~~Q1 2018~~Q3 2020 as compared to ~~Q1 2017.~~Q3 2019. Significant items impacting sales during Q3 2020 included ~~$9.2~~a $10.2 million increase in sales related to price increases implemented by cigarette manufacturers, ~~and~~ a ~~$3.9~~$6.6 million increase in sales in our tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, foodservice, and store supplies categories (“Other Products”). These increases were partially offset by a $7.7 million decrease in sales related to the volume and mix of cigarette cartons ~~sold.~~sold, a $5.1 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), and a $4.5 million increase in sales related to an increase in cigarette state excise taxes. Sales in our Retail Segment increased ~~$0.1~~$0.5 million ~~in Q1 2018~~for Q3 2020 as compared to ~~Q1 2017. Significant items impacting our Q1 2018 Retail Segment sales included a 0.4~~Q3 2019. Of this increase, approximately $0.8 million ~~increase in sales~~ related to ~~the opening of a new store in our Florida market, which was partially offset by lower~~higher sales volumes in our existing stores which have experienced ~~increased competition.~~an increase in customer traffic related to

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home-pantry building in response to the COVID-19 pandemic and the closure of competitors. This increase was partially offset by a $0.3 million decrease in sales volume related to the closure of one non-performing store in our Midwest market which was nearing the end of its lease term.

GROSS PROFIT – ~~Q1 2018~~Q3 2020 vs. ~~Q1 2017~~Q3 2019

Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale 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 ~~decreased $0.1~~increased $1.0 million during ~~Q1 2018~~Q3 2020 as compared to ~~Q1 2017.~~Q3 2019. Significant items impacting gross ~~margins~~profit during ~~Q1 2018~~Q3 2020 included a $0.3 million ~~decrease~~increase in gross profit ~~primarily~~ related to the volume and mix of cigarette cartons sold, ~~partially offset by~~ a ~~$0.2~~$0.3 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods, and a $0.4 million increase in gross profit related to higher sales volumes and promotions in our Other Products category. ~~Q1 2018 gross~~Gross profit in our Retail Segment ~~was even with Q1 2017. Significant items impacting our Q1 2018 Retail Segment gross profit included a~~increased $0.2 million ~~increase in gross profit~~during Q3 2020 as compared to Q3 2019 primarily related to ~~the opening of our new Florida market store which was offset by the impact of lower sales and~~higher gross ~~profit~~margins in our existing stores as ~~previously discussed.~~ a result of variations in volume and product mix between the comparative periods, partially offset by the closure of one non-performing store in our Midwest market.

OPERATING EXPENSE – ~~Q1 2018~~Q3 2020 vs. ~~Q1 2017~~Q3 2019

Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses ~~include~~primarily consist of costs related to our sales, warehouse, delivery and administrative departments, ~~for all segments. Specifically,~~including purchasing and receiving costs, warehousing costs and costs of picking and loading customer ~~orders are all classified as selling, general and administrative expenses.~~orders. Our most significant expenses relate to ~~employee~~ costs associated with employees, facility and equipment leases, transportation, ~~costs,~~ fuel, and insurance. Our Q3 2020 operating expenses were even with Q3 2019. Significant items impacting operating expenses during Q3 2020 included a $0.4 million increase in employee compensation and benefit costs and a $0.4 million increase in health insurance costs. ~~Our Q1 2018~~These increases were offset by a $0.4 million decrease in other operational expenses and a $0.4 million decrease in expenses in our Retail Segment. The change in our Retail Segment operating expenses ~~increased $0.7 million~~was primarily related to reduced payroll and compensation costs and the closure of one non-performing store in our Midwest market.

INCOME TAX EXPENSE – Q3 2020 vs. Q3 2019

The change in the Q3 2020 income tax rate as compared to ~~Q1 2017.~~Q3 2019, was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.

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RESULTS OF OPERATIONS – NINE MONTHS ENDED JUNE 2020


	2020			2019			Incr (Decr)		% Change
CONSOLIDATED:
Sales(1)	$	1,094,841,943		$	1,025,431,309		$	69,410,634	6.8
Cost of sales		1,031,651,499			963,683,859			67,967,640	7.1
Gross profit		63,190,444			61,747,450			1,442,994	2.3
Gross profit percentage		5.8	%		6.0	%

Operating expenses		58,161,311			55,731,321			2,429,990	4.4
Operating income		5,029,133			6,016,129			(986,996)	(16.4)
Interest expense		1,321,267			1,100,995			220,272	20.0
Income tax expense		1,168,000			1,536,000			(368,000)	(24.0)
Net income		2,730,754			3,434,215			(703,461)	(20.5)

BUSINESS SEGMENTS:
Wholesale
Sales	$	1,060,212,478		$	991,429,698		$	68,782,780	6.9
Gross profit		51,309,852			48,559,911			2,749,941	5.7
Gross profit percentage		4.8	%		4.9	%
Retail
Sales	$	34,629,465		$	34,001,611		$	627,854	1.8
Gross profit		11,880,592			13,187,539			(1,306,947)	(9.9)
Gross profit percentage		34.3	%		38.8	%

(1)

Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $19.8 million for the nine month period ended June 2020 and $19.0 million for the nine month period ended June 2019.

SALES – Nine Months Ended June 2020

Sales in our Wholesale Segment increased $68.8 million for the nine months ended June 2020 as compared to the same prior year period. Significant items impacting sales during the period included a $29.0 million increase in sales related to price increases implemented by cigarette manufacturers, a $23.5 million increase in sales related to higher sales volumes in our Other Products categories, a $11.8 million increase in sales related to an increase in cigarette state excise taxes and a $4.5 million increase in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.6 million for the nine months ended June 2020 as compared to the same prior year period. Of this increase, approximately $1.1 million related to higher sales volumes in our existing stores which have experienced an increase in customer traffic related to home-pantry building in response to the COVID-19 pandemic and the closure of competitors. This increase was partially offset by a $0.5 million decrease in sales volume related to the closure of one non-performing store in our Midwest market which was nearing the end of its lease term.

GROSS PROFIT – Nine Months Ended June 2020

Gross profit in our Wholesale Segment increased $2.7 million for the nine months ended June 2020 as compared to the same prior year period. Significant items impacting gross profit during the period included a $2.3 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.3 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods and a $0.1 million increase in gross profit related to the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment decreased $1.3 million for the nine months ended June 2020 as compared to the same prior year period primarily related to lower gross margins in our existing stores as a result of variations in volume and product mix between the comparative periods and the closure of one non-performing store in our Midwest market.

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OPERATING EXPENSE – Nine Months Ended June 2020

Operating expenses increased $2.4 million during the nine months ended June 2020 as compared to the same prior year period. Significant items impacting operating expenses during the ~~current~~ period included a ~~$0.4~~$1.6 million increase in employee ~~benefits~~compensation and ~~compensation~~benefit costs, ~~including~~a $0.5 million increase in health insurance costs, a $0.7 million increase in other insurance costs, and a $0.2 million increase in ~~fuel costs, and~~our provision for doubtful accounts, partially offset by a ~~$0.1~~$0.6 million ~~increase~~decrease in ~~operating costs~~expenses in our Retail Segment. The change in our Retail Segment operating expenses was primarily related to $0.4 million of reduced payroll and compensation costs and $0.2 million related to the ~~opening~~closure of one non-performing store in our ~~new Florida market store.~~Midwest market.

INCOME TAX EXPENSE – Nine Months Ended June 2020

The change in the income tax rate for the nine months ended June 2020 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.

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~~INCOME TAX EXPENSE – Q1 2018 vs. Q1 2017~~

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”~~“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 ~~the warm weather months which is~~ our peak time of operations in the warm weather months, we generally carry higher amounts of inventory to ensure high fill rates and customer satisfaction.

In general, the Company finances its operations through a credit facility agreement (the “Facility”) with Bank of America acting as the senior agent and with BMO Harris Bank participating in the loan syndication. The Facility included the following significant terms at ~~December 2017:~~June 2020:

●

A ~~November 2022~~March 2025 maturity date without a penalty for prepayment.

●

$~~70.0~~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.

●

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.

In no event shall LIBOR be less than 100 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 ~~availability has not fallen below 10% of the maximum loan limit and the Company’s~~ fixed charge ratio iswas over 1.0 for the trailing twelve months.

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●

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 ~~December 2017~~June 2020 was ~~$64.2~~$95.0 million, of which ~~$12.6~~$56.4 million was outstanding, leaving ~~$51.6~~$38.6 million available.

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At ~~December 2017,~~June 2020, the revolving portion of the Company’s Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was ~~3.49%~~2.42% at ~~December 2017.~~June 2020. For the ~~three~~nine months ended ~~December 2017,~~June 2020, our peak borrowings under the Facility were ~~$35.6~~$72.7 million, and our average borrowings and average availability under the Facility were ~~$17.3~~$50.1 million and ~~$50.9~~$30.8 million, respectively.

Cross Default and Co-Terminus Provisions

The ~~Company’s owned~~Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term loan with BMO Harris Bank (the “Real Estate Loan”) which is also a participant lender on the Company’s revolving line of credit. The Real Estate Loan contains cross default provisions which cause the loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, isare in default. There were no such cross defaults at ~~December 2017.~~June 2020. In addition, the Real Estate Loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.

~~Dividends~~Dividend Payments

~~Contractual Obligations~~

~~There have been no significant changes to the Company’s contractual obligations as set forth in the Company’s annual report on Form 10-K~~$0.1 million and $0.5 million for the ~~fiscal period~~three and nine month periods ended ~~September 30, 2017.~~June 2019, respectively.

Other

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

Off-Balance Sheet Arrangements

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

Liquidity Risk

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

The recent COVID-19 pandemic has fundamentally changed the operating environment for the foreseeable future. While both of our businesses are considered essential services and remain open, the Company cannot predict the long term impact on its workforce, supply chain, or customer base, particularly as it relates to trade credit risk and customer liquidity/solvency.

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

The Company believes ~~its~~it has sufficient liquidity ~~position going forward~~and access to capital. The operating environment, however, is fluid and changing on a daily basis and it remains unclear how costs, revenues, profitability, or cash flows in future periods will be ~~adequate to sustain operations. However,~~impacted. Accordingly, a ~~precipitous change~~further deterioration in ~~operating environment~~economic conditions could materially impact the Company’s future revenue ~~stream~~streams as well as its ability to collect on customer accounts receivable or secure bank credit.

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Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk.~~Risk

Not applicable.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

As required by Rules ~~13a-15(e)~~13a-15(b) and ~~15d-15(e)~~15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of ~~December 31, 2017~~June 30, 2020 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~~Except as described above under “Other” in Part I, Item 4., there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended ~~December 31, 2017,~~June 2020, 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

●	A Major Epidemic or Pandemic or other Widespread Public Health Issue Could Adversely Affect Our Results of Operations and Financial Condition.

The emergence and spread of a major epidemic or pandemic (such as the recent COVID-19 or coronavirus) or other widespread public health issue could affect our employees, suppliers and/or customers and cause disruption in our operations including, but not limited to, travel restrictions, temporary closing of one or more of our distribution warehouses or retail stores, labor shortages, business shutdowns, or regional quarantines. These disruptions could negatively affect our ability to service our customers, could contribute to adverse economic conditions including decreases in demand for the products we distribute, resulting in lower sales and profitability, or could present increased credit risk to the Company from customer credit defaults resulting from an economic downturn. In addition to the potential operational risks described above, disruptions caused by a widespread public health issue could present increased reputational risk to the Company or result in legal claims or costly response measures.

There have been no other 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, ~~2017.~~2019.

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

The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the quarterly period ended ~~December 2017:~~June 2020:

Period

(a) Total Number of Shares (or Units) Purchased

(b) Average Price Paid per Share (or Unit)

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

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

October 1 - 31, 2017

—

—

—

49,068

November 1 - 30, 2017

171

$
88.70

171

48,897

December 1 - 31, 2017

—

—

—

50,000

Total

171

$
88.70

171

50,000


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs*
April 1 - 30, 2020	38	$	62.98	38	74,962
May 1 - 31, 2020	317	$	56.99	317	74,645
June 1 - 30, 2020	793	$	59.48	793	73,852
Total	1,148	$	58.91	1,148	73,852

In April 2020, the Company’s Board of Directors replenished the existing share repurchase authority to authorize purchases of up to 75,000 shares of the Company’s common stock in open market or negotiated transactions. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

*In December 2017, the Company’s Board of Directors authorized purchases of up to 50,000 shares of our Company's common stock in open market or negotiated transactions. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

During Q1 2018, the Company renewed a labor agreement with approximately thirty wholesale delivery employees in its Quincy, Illinois distribution center who are represented by the International Association of Machinists and Aerospace Workers (“IAMAW”) which was due to expire at the end of December 2017. The new labor agreement was renewed on substantially the same terms as the expiring agreement and is effective through December 2020.Not applicable.

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Item 6. Exhibits

(a) Exhibits



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

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

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

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

	101	Interactive Data File (filed herewith electronically)

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SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMCON DISTRIBUTING COMPANY
	(registrant)

Date: ~~January 18, 2018~~July 20, 2020	/s/ Christopher H. Atayan
	Christopher H. Atayan,
	Chief Executive Officer and Chairman

Date: ~~January 18, 2018~~July 20, 2020	/s/ Andrew C. Plummer
	Andrew C. Plummer,
	~~Vice~~ President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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	Stock Option		Stock Option
	Pricing		Pricing
	Assumptions		Assumptions
	2018		2017
Risk-free interest rate	2.41	%	2.12	%
Dividend yield	0.8	%	0.6	%
Expected volatility	33.00	%	22.40	%
Expected life in years	6		6


		Weighted
	Number	Average
	of	Exercise
	Shares	Price
Outstanding at September 2017	28,300	$	74.75
Granted	6,000		90.50
Exercised	—		—
Forfeited/Expired	—		—
Outstanding at December 2017	34,300	$	77.50


	Restricted Stock Units(1)		Restricted Stock Units(2)		Restricted Stock Units(3)		Restricted Stock Units(4)
Date of award:		October 2013		October 2015		October 2016		October 2017
Original number of awards issued:		17,600		13,250		13,000		13,000
Service period:		36 - 60 months		36 - 60 months		36 months		36 months
Estimated fair value of award at grant date:	$	1,486,000	$	1,112,000	$	1,191,000	$	1,177,000
Non-vested awards outstanding at December 31, 2017:		660		4,484		8,667		13,000
Fair value of non-vested awards at December 31, 2017 of approximately:	$	65,000	$	439,000	$	848,000	$	1,272,000


Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs*
October 1 - 31, 2017	—		—	—	49,068
November 1 - 30, 2017	171	$	88.70	171	48,897
December 1 - 31, 2017	—		—	—	50,000
Total	171	$	88.70	171	50,000