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DIT Amcon Distributing

Filed: 19 Jan 21, 4:10pm

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, 2020

OR

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

For the transition period from ___________to _________

Commission File Number 1-15589


amcon_4c_logo.eps

(Exact name of registrant as specified in its charter)

Delaware

    

47-0702918

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

7405 Irvington Road, Omaha NE

68122

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: (402) 331-3727

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 Par Value

DIT

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)  Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes  No

The Registrant had 551,369 shares of its $.01 par value common stock outstanding as of January 15, 2021.



PART I — FINANCIAL INFORMATION

Item 1.      Financial Statements

AMCON Distributing Company and Subsidiaries

Condensed Consolidated Balance Sheets

December 31, 2020 and September 30, 2020

December

September

    

2020

    

2020

(Unaudited)

ASSETS

Current assets:

Cash

$

515,098

$

661,195

Accounts receivable, less allowance for doubtful accounts of $0.8 million at December 2020 and $0.9 million at September 2020

 

29,712,850

 

34,278,429

Inventories, net

 

67,832,187

 

98,971,773

Prepaid and other current assets

 

7,884,267

 

2,091,645

Total current assets

 

105,944,402

 

136,003,042

Property and equipment, net

 

17,171,501

 

17,497,274

Operating lease right-of-use assets, net

18,660,239

18,936,126

Note receivable

3,500,000

3,500,000

Goodwill

 

4,436,950

 

4,436,950

Other intangible assets, net

 

500,000

 

500,000

Equity method investment

7,189,433

6,744,095

Other assets

 

343,593

 

383,786

Total assets

$

157,746,118

$

188,001,273

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

17,054,417

$

22,108,299

Accrued expenses

 

11,137,468

 

8,306,160

Accrued wages, salaries and bonuses

 

2,468,758

 

4,761,020

Income taxes payable

 

465,553

 

567,408

Current operating lease liabilities

5,756,176

5,607,098

Current maturities of long-term debt

 

512,344

 

516,850

Total current liabilities

 

37,394,716

 

41,866,835

Credit facility

 

33,051,949

 

61,971,682

Deferred income tax liability, net

 

1,939,311

 

1,806,575

Long-term operating lease liabilities

13,575,388

14,028,606

Long-term debt, less current maturities

 

5,477,181

 

2,608,794

Other long-term liabilities

 

757,387

 

927,241

Shareholders’ equity:

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

 

 

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

 

8,834

 

8,697

Additional paid-in capital

 

25,007,239

 

24,282,058

Retained earnings

 

71,401,400

 

71,362,334

Treasury stock at cost

 

(30,867,287)

 

(30,861,549)

Total shareholders’ equity

 

65,550,186

 

64,791,540

Total liabilities and shareholders’ equity

$

157,746,118

$

188,001,273

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

3


AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Operations

for the three months ended December 31, 2020 and 2019

For the three months ended December

    

2020

  

2019

Sales (including excise taxes of $100.5 million and $94.0 million, respectively)

$

404,744,774

$

360,101,103

Cost of sales

 

381,282,795

 

339,256,392

Gross profit

 

23,461,979

 

20,844,711

Selling, general and administrative expenses

 

18,599,816

 

18,952,735

Depreciation and amortization

 

774,285

 

725,461

 

19,374,101

 

19,678,196

Operating income

 

4,087,878

 

1,166,515

Other expense (income):

Interest expense

 

376,430

 

472,423

Other (income), net

 

(41,823)

 

(6,778)

 

334,607

 

465,645

Income from operations before income taxes

 

3,753,271

 

700,870

Income tax expense

 

1,011,000

 

249,000

Equity method investment earnings, net of tax

 

335,339

 

Net income available to common shareholders

$

3,077,610

$

451,870

Basic earnings per share available to common shareholders

$

5.61

$

0.80

Diluted earnings per share available to common shareholders

$

5.57

$

0.80

Basic weighted average shares outstanding

 

548,125

 

562,578

Diluted weighted average shares outstanding

 

552,059

 

567,794

 

Dividends declared and paid per common share

$

0.18

$

0.18

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

4


AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Shareholders’ Equity

for the three months ended December 31, 2020 and 2019

Additional

Common Stock

Treasury Stock

Paid-in

Retained

   

Shares

   

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Total

THREE MONTHS ENDED DECEMBER 2019

Balance, October 1, 2019

 

856,039

$

8,561

 

(303,425)

$

(28,831,855)

$

23,165,639

$

66,414,397

$

60,756,742

Dividends on common stock, $0.46 per share

 

(273,630)

(273,630)

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

 

13,328

131

1,027,315

1,027,446

Repurchase of common stock

(109)

(8,156)

(8,156)

Net income

 

 

451,870

451,870

Balance, December 31, 2019

 

869,367

$

8,692

 

(303,534)

$

(28,840,011)

$

24,192,954

$

66,592,637

$

61,954,272

THREE MONTHS ENDED DECEMBER 2020

Balance, October 1, 2020

 

869,867

$

8,697

 

(332,152)

$

(30,861,549)

$

24,282,058

$

71,362,334

$

64,791,540

Dividends on common stock, $5.18 per share

 

(3,038,544)

(3,038,544)

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

 

13,722

137

725,181

725,318

Repurchase of common stock

(68)

(5,738)

(5,738)

Net income

 

 

3,077,610

3,077,610

Balance, December 31, 2020

 

883,589

$

8,834

 

(332,220)

$

(30,867,287)

$

25,007,239

$

71,401,400

$

65,550,186

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

5


AMCON Distributing Company and Subsidiaries

Condensed Consolidated Unaudited Statements of Cash Flows

for the three months ended December 31, 2020 and 2019

December

December

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

3,077,610

$

451,870

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

Depreciation

774,285

725,461

Equity method investment earnings, net of tax

(335,339)

Loss (gain) on sales of property and equipment

(2,000)

Equity-based compensation

346,891

129,931

Deferred income taxes

132,736

154,792

Provision (recovery) for losses on doubtful accounts

(24,000)

371,000

Inventory allowance

172,137

51,587

Other

(42,011)

Changes in assets and liabilities:

Accounts receivable

4,589,579

(7,171,661)

Inventories

30,967,449

39,333,140

Prepaid and other current assets

(5,792,622)

(1,578,437)

Other assets

40,193

42,052

Accounts payable

(5,069,889)

(1,623,841)

Accrued expenses and accrued wages, salaries and bonuses

(1,793,704)

(2,509,401)

Other long-term liabilities

(169,854)

Income taxes payable and receivable

(211,854)

95,772

Net cash flows from (used in) operating activities

26,701,618

28,430,254

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment

(432,505)

(1,228,462)

Proceeds from sales of property and equipment

2,000

Net cash flows from (used in) investing activities

(430,505)

(1,228,462)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under revolving credit facility

385,943,710

330,596,076

Repayments under revolving credit facility

(414,863,443)

(357,448,761)

Proceeds from borrowings on long-term debt

3,000,000

Principal payments on long-term debt

(136,119)

(131,580)

Repurchase of common stock

(5,738)

(8,156)

Dividends on common stock

(105,599)

(107,084)

Settlement and withholdings of equity-based awards

(250,021)

Net cash flows from (used in) financing activities

(26,417,210)

(27,099,505)

Net change in cash

(146,097)

102,287

Cash, beginning of period

661,195

337,704

Cash, end of period

$

515,098

$

439,991

Supplemental disclosure of cash flow information:

Cash paid during the period for interest

$

426,655

$

519,459

Cash paid (refunded) during the period for income taxes

 

1,090,119

 

(1,563)

Supplemental disclosure of non-cash information:

Equipment acquisitions classified in accounts payable

$

16,007

$

234,816

Dividends declared, not paid

2,932,945

166,546

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

 

949,812

 

990,653

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

6


AMCON Distributing Company and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

AMCON Distributing Company and Subsidiaries (“AMCON” or the “Company”) operate two business segments:

Our wholesale distribution segment (“Wholesale Segment”) distributes consumer products and provides a full range of programs and services to our customers that are focused on helping them manage their business and increase their profitability. We serve customers in 26 states and primarily operate in the Central, Rocky Mountain, and Mid-South regions of the United States.

Our retail health food segment (“Retail Segment”) operates twenty-one health food retail stores located throughout the Midwest and Florida.

WHOLESALE SEGMENT

Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,100 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 17,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In December 2020, Convenience Store News ranked us as the seventh (7th) largest convenience store distributor in the United States based on annual sales.

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

Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross-dock facilities, include approximately 685,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kelloggs, Kraft, and Mars Wrigley. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.

RETAIL SEGMENT

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

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

7


Our Retail Segment operates twenty-one retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akin’s”), and Earth Origins Market (“EOM”). These stores carry over 33,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was established in 1935, has a total of seven locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. EOM has a total of eight locations in Florida.

    

FINANCIAL STATEMENTS

The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2020, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended December 31, 2020 and December 31, 2019 have been referred to throughout this quarterly report as Q1 2021 and Q1 2020, respectively. The fiscal balance sheet dates as of December 31, 2020 and September 30, 2020 have been referred to as December 2020 and September 2020, respectively.

ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models, and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for the Company) with early adoption permitted. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.

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

2. INVENTORIES

Inventories in our wholesale segment consisted of finished goods and are stated at the lower of cost or net realizable value, determined on a FIFO basis. Inventories in our retail segment consisted of finished goods and are stated at the lower of cost or market using the retail method. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $0.9 million at December 2020 and $0.7 million at September 2020. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.

8


3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill at December 2020 and September 2020 was as follows:

    

December

    

September

2020

2020

Wholesale Segment

$

4,436,950

$

4,436,950

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

    

December

    

September

2020

    

2020

Trademarks and tradenames (Retail Segment)

$

500,000

$

500,000

Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. Goodwill recorded on the Company’s consolidated balance sheet represents amounts allocated to its wholesale reporting unit which totaled $4.4 million at both December 2020 and September 2020. The Company performs its annual impairment testing during the fourth fiscal quarter of each year or as circumstances change or necessitate. There have been no material changes to the Company’s impairment assessments since its fiscal year ended September 2020.

4. EQUITY METHOD INVESTMENT

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

At December 2020, AMCON owned approximately 44% of Team Sledd’s outstanding equity, with a carrying value of $7.2 million. For the three months ended December 2020, the Company recognized $0.3 million in equity in earnings (net of income taxes) from its investment in Team Sledd. The Company’s secured loan to Team Sledd had a carrying value of $3.5 million as of December 2020. Pursuant to an operating agreement between the Company and Sledd, it is anticipated that certain membership interests in Team Sledd will be redeemed over a period of years, with such redemptions to be funded from the operations of Team Sledd. These redemptions would result in corresponding increases in the percentage of the outstanding equity of Team Sledd owned by AMCON.

Team Sledd’s summarized financial data for the three months ended December 2020 was as follows:

    

For the three months ended December 2020

(Unaudited)

Sales

$

164,568,084

Gross profit

$

7,847,390

Net income before income taxes

$

1,003,793

Net income attributable to AMCON, net of tax

$

335,339

5. DIVIDENDS

The Company paid a $0.18 per share cash dividend on its common stock totaling $0.1 million in each of the three month periods ended December 2020 and December 2019, respectively. During Q1 2021, the Company also declared a $5.00 per share special dividend totaling approximately $2.9 million. This special dividend will be paid in the Company’s second fiscal quarter.

9


6. EARNINGS PER SHARE

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

For the three months ended December

2020

2019

    

Basic

    

Diluted

    

Basic

    

Diluted

Weighted average common shares outstanding

548,125

548,125

562,578

562,578

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

3,934

5,216

Weighted average number of shares outstanding

548,125

552,059

562,578

567,794

Net income available to common shareholders

$

3,077,610

$

3,077,610

$

451,870

$

451,870

Net earnings per share available to common shareholders

$

5.61

$

5.57

$

0.80

$

0.80


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

7. DEBT

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

CREDIT FACILITY

The Facility included the following significant terms at December 2020:

A March 2025 maturity date without a penalty for prepayment.

$110.0 million revolving credit limit.

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

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

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

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

Lending limits subject to accounts receivable and inventory limitations.

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

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

10


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

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

The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at December 2020 was $87.7 million, of which $33.1 million was outstanding, leaving $54.6 million available.

At December 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 2.13% at December 2020. For the three months ended December 2020, our peak borrowings under the Facility were $71.7 million, and our average borrowings and average availability under the Facility were $49.5 million and $43.1 million, respectively.

LONG-TERM DEBT

In addition to the Facility, the Company also had the following long term obligations at December 2020.

    

December 2020

    

September 2020

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

$

4,765,058

$

1,866,231

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

 

1,224,467

 

1,259,413

 

5,989,525

 

3,125,644

Less current maturities

 

(512,344)

 

(516,850)

$

5,477,181

$

2,608,794

Cross Default and Co-Terminus Provisions

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

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.

11


8. EQUITY-BASED INCENTIVE AWARDS

Omnibus Plans

The Company has two equity-based incentive plans, the 2014 Omnibus Incentive Plan and 2018 Omnibus Incentive Plan (collectively “the Omnibus Plans”), which provide for equity incentives to employees. Each Omnibus Plan was designed with the intent of encouraging employees to acquire a vested interest in the growth and performance of the Company. The Omnibus Plans together permit the issuance of up to 135,000 shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units, performance share awards as well as awards such as stock appreciation rights, performance units, performance shares, bonus shares, and dividend share awards payable in the form of common stock or cash. The number of shares issuable under the Omnibus Plans is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock. At December 2020, awards with respect to a total of 120,751 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plans and awards with respect to another 14,249 shares may be awarded under the Omnibus Plans.

Stock Options

The following is a summary of stock option activity during Q1 2021:

    

    

Weighted

Number

Average

of

Exercise

Shares

Price

Outstanding at September 2020

 

34,350

$

80.33

Granted

 

Exercised

 

(7,300)

 

59.19

Forfeited/Expired

 

(500)

 

84.00

Outstanding at December 2020

 

26,550

$

86.07

Restricted Stock Units

At December 2020, 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)

Date of award:

 

October 2018

October 2019

October 2020

Original number of awards issued:

 

15,050

14,550

20,500

Service period:

 

36 months

36 months

36 months

Estimated fair value of award at grant date:

$

1,264,000

$

1,007,000

$

1,415,000

Non-vested awards outstanding at
December 31, 2020:

5,019

9,701

20,500

Fair value of non-vested awards at
December 31, 2020 of approximately:

$

597,000

$

1,154,000

$

2,438,000


(1)

10,031 of the restricted stock units were vested as of December 2020.  The remaining 5,019 restricted stock units will vest in October 2021.

(2)

4,849 of the restricted stock units were vested as of December 2020. 4,850 restricted stock units will vest in October 2021 and 4,851 will vest in October 2022.

(3)

The 20,500 restricted stock units will vest in equal amounts in October 2021, October 2022, and October 2023.

12


There is no direct cost to the recipients of the restricted stock units, except for any applicable taxes. The recipients of the restricted stock units are entitled 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 liability method.

The following summarizes restricted stock unit activity under the Omnibus Plans during Q1 2021:

Number

Weighted

of

Average

    

Shares

    

Fair Value

Nonvested restricted stocks units at September 2020

 

28,971

$

64.59

Granted

 

20,500

69.01

Vested

 

(14,251)

68.65

Expired

 

Nonvested restricted stocks units at December 2020

 

35,220

$

118.95

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

Net income before income taxes included compensation expense of approximately $0.3 million and $0.1 million during Q1 2021 and Q1 2020, respectively, related to the amortization of all equity-based compensation awards. Total unamortized compensation expense related to these awards at December 2020 and September 2020 was approximately $3.9 million and $1.3 million, respectively.

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 2020

External revenues:

Cigarettes

$

276,589,707

$

$

$

276,589,707

Tobacco

64,845,544

64,845,544

Confectionery

20,164,577

20,164,577

Health food

11,147,098

11,147,098

Foodservice & other

31,997,848

31,997,848

Total external revenue

393,597,676

11,147,098

404,744,774

Depreciation

472,693

301,592

774,285

Operating income (loss)

5,788,239

(114,987)

(1,585,374)

4,087,878

Interest expense

29,536

346,894

376,430

Income (loss) from operations before taxes

5,769,260

(112,159)

(1,903,830)

3,753,271

Equity method investment earnings, net of tax

335,339

335,339

Total assets

128,232,076

18,583,221

10,930,821

157,746,118

Capital expenditures

406,440

42,072

448,512

13


Wholesale

Retail

    

Segment

    

Segment

    

Other

    

Consolidated

THREE MONTHS ENDED DECEMBER 2019

External revenue:

Cigarettes

$

245,050,054

$

$

$

245,050,054

Tobacco

54,317,548

54,317,548

Confectionery

20,836,862

20,836,862

Health food

10,096,495

10,096,495

Foodservice & other

29,800,144

29,800,144

Total external revenue

350,004,608

10,096,495

360,101,103

Depreciation

432,263

293,198

725,461

Operating income (loss)

3,649,014

(1,142,306)

(1,340,193)

1,166,515

Interest expense

33,974

438,449

472,423

Income (loss) from operations before taxes

3,619,664

(1,140,152)

(1,778,642)

700,870

Total assets

125,529,755

21,947,811

122,891

147,600,457

Capital expenditures

793,681

600,344

1,394,025

10. COMMON STOCK REPURCHASES

The Company repurchased a total of 68 and 109 shares of its common stock during the three months ended December 2020 and December 2019, respectively, for cash totaling less than $0.1 million in each respective period. All repurchased shares 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, and community-based regulations, 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 consumer demand, our supply chain or our ability to procure products or fulfill orders due to disruptions in our warehouse operations.

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

FORWARD-LOOKING STATEMENTS

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

14


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

risks associated with the threat or occurrence of epidemics or pandemics (such as the recent COVID-19 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,

risks associated with the acquisition of assets or new businesses or investments in equity investees by either of our business segments including, but not limited to, risks associated with purchase price and business valuation risks, vendor and customer retention risks, employee and technology integration risks, and risks related to the assumption of certain liabilities or obligations,
increasing competition and market conditions in our wholesale and retail health food businesses and any associated impact on the carrying value and any potential impairment of assets (including intangible assets) within those businesses,

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

risks associated with opening new retail stores,

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

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

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

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

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

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

regulations, potential bans and/or litigation related to the manufacturing, distribution, and sale of certain cigarette, tobacco, and e-cigarette/vaping products by the United States Food and Drug Administration (“FDA”), state or local governmental agencies, or other parties,

increases in inventory carrying costs and customer credit risks,

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

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

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

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

15


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

decreased availability of capital resources,

domestic regulatory and legislative risks,

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

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

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

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

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

IMPACT OF COVID-19 (CORONAVIRUS) ON OUR BUSINESS

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, and community-based regulations, 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 comsumer demand, our supply chain or our ability to procure products or fulfill orders due to disruptions in our warehouse operations.

CRITICAL ACCOUNTING ESTIMATES

Certain accounting estimates used in the preparation of the Company’s condensed consolidated unaudited financial statements (“financial statements”) require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2020, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the three months ended December 2020.

16


FIRST FISCAL QUARTER 2021 (Q1 2021)

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

Wholesale Segment

Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,100 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 17,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In December 2020, Convenience Store News ranked us as the seventh (7th) largest convenience store distributor in the United States based on annual sales.

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

Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross-dock facilities, include approximately 685,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kelloggs, Kraft, and Mars Wrigley. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.

Retail Segment

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

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

Our Retail Segment operates twenty-one retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akin’s”), and Earth Origins Market (“EOM”). These stores carry over 33,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was established in 1935, has a total of seven locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. EOM has a total of eight locations in Florida.

17


RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER:

    

2020

    

2019

    

Incr (Decr)

    

% Change

CONSOLIDATED:

Sales(1)

$

404,744,774

$

360,101,103

$

44,643,671

 

12.4

Cost of sales

 

381,282,795

 

339,256,392

 

42,026,403

 

12.4

Gross profit

 

23,461,979

 

20,844,711

 

2,617,268

 

12.6

Gross profit percentage

 

5.8

%  

 

5.8

%  

 

Operating expense

$

19,374,101

$

19,678,196

$

(304,095)

 

(1.5)

Operating income

 

4,087,878

 

1,166,515

 

2,921,363

 

250.4

Interest expense

 

376,430

 

472,423

 

(95,993)

 

(20.3)

Income tax expense

 

1,011,000

 

249,000

 

762,000

 

306.0

Net income

 

3,077,610

 

451,870

 

2,625,740

 

581.1

BUSINESS SEGMENTS:

Wholesale

Sales

$

393,597,676

$

350,004,608

$

43,593,068

 

12.5

Gross profit

 

19,367,341

 

17,586,795

 

1,780,546

 

10.1

Gross profit percentage

 

4.9

%  

 

5.0

%  

 

Retail

Sales

$

11,147,098

$

10,096,495

$

1,050,603

 

10.4

Gross profit

 

4,094,638

 

3,257,916

 

836,722

 

25.7

Gross profit percentage

 

36.7

%  

 

32.3

%  

 


(1)Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $6.8 million in Q1 2021 and $6.1 million in Q1 2020.

SALES

Changes in sales are driven by two primary components:

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

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

SALES – Q1 2021 vs. Q1 2020

Sales in our Wholesale Segment increased $43.6 million during Q1 2021 as compared to Q1 2020. Significant items impacting sales during Q1 2021 included a $14.4 million increase in sales related to price increases implemented by cigarette manufacturers, a $17.1 million increase in sales related to the volume and mix of cigarette cartons sold, and a $12.1 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”). Sales in our Retail Segment increased $1.1 million during Q1 2021 as compared to Q1 2020. Of this increase, approximately $1.3 million related to higher sales volumes in our existing stores, partially offset by a $0.2 million decrease in sales volume related to the closure of one non-performing store in our Midwest market during the prior fiscal period which was nearing the end of its lease term.

GROSS PROFIT – Q1 2021 vs. Q1 2020

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

18


Gross profit in our Wholesale Segment increased $1.8 million during Q1 2021 as compared to Q1 2020. Significant items impacting gross profit during Q1 2021 included a $1.3 million increase in gross profit related to higher sales volumes and promotions in our Other Products category and a $0.5 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods. Gross profit in our Retail Segment increased $0.8 million during Q1 2021 as compared to Q1 2020. This change was primarily related to higher sales and gross margins in our existing stores resulting from variations in volume and product mix between the comparative periods, partially offset by the closure of one non-performing store in our Midwest market during the prior year period.

OPERATING EXPENSE – Q1 2021 vs. Q1 2020

Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q1 2021 operating expenses decreased $0.3 million as compared to Q1 2020. Significant items impacting operating expenses during Q1 2021 included a $0.4 million decrease in bad debt expense and a $0.2 million decrease in our Retail Segment expenses primarily related to the closure of one non-performing store in our Midwest market during the prior fiscal period. These decreases were partially offset by a $0.3 million increase in employee compensation and benefit costs.

INCOME TAX EXPENSE – Q1 2021 vs. Q1 2020

The change in the Q1 2021 income tax rate as compared to Q1 2020, was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.

19


LIQUIDITY AND CAPITAL RESOURCES

Overview

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

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

A March 2025 maturity date without a penalty for prepayment.

$110.0 million revolving credit limit.

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

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

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

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

Lending limits subject to accounts receivable and inventory limitations.

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

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

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

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

The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at December 2020 was $87.7 million, of which $33.1 million was outstanding, leaving $54.6 million available.

20


At December 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 2.13% at December 2020. For the three months ended December 2020, our peak borrowings under the Facility were $71.7 million, and our average borrowings and average availability under the Facility were $49.5 million and $43.1 million, respectively.

Cross Default and Co-Terminus Provisions

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

Dividend Payments

The Company paid a $0.18 per share cash dividend on its common stock totaling $0.1 million in each of the three month periods ended December 2020 and December 2019, respectively. During Q1 2021, the Company also declared a $5.00 per share special dividend totaling approximately $2.9 million. This special dividend will be paid in the Company’s second fiscal quarter.

Other

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

Off-Balance Sheet Arrangements

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

Liquidity Risk

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

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

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

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

21


Item 4.      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 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 were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 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

There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A “Risk Factors” of the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2020.

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

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 2020:

Period

Total Number of Shares (or Units) Purchased

Average Price Paid per Share (or Unit)

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

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

October 1 - 31, 2020

 

 

$

 

 

75,000

November 1 - 30, 2020

 

68

 

$

82.91

 

68

 

74,932

December 1 - 31, 2020

 

$

 

 

74,932

Total

 

68

$

82.91

 

68

 

74,932


*

In October 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.

Item 3.      Defaults Upon Senior Securities

Not applicable.

Item 4.      Mine Safety Disclosures

Not applicable.

Item 5.      Other Information

Not applicable.

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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 19, 2021

/s/ Christopher H. Atayan

Christopher H. Atayan,

Chief Executive Officer and Chairman

Date: January 19, 2021

/s/ Charles J. Schmaderer

Charles J. Schmaderer,

Vice President, Chief Financial Officer and Secretary

(Principal Financial and Accounting Officer)

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