Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
◻
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission File Number 1-15589
(Exact name of registrant as specified in its charter)
Delaware
47-0702918
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
7405 Irvington Road, Omaha NE
68122
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (402) 331-3727
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
DIT
NYSE American
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ◻
Non-accelerated filer ⌧
Smaller reporting company ☒Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ◻ No ⌧
The Registrant had 551,369 shares of its $.01 par value common stock outstanding as of April 16, 2021.
Form 10-Q
2nd Quarter
INDEX
March 31, 2021
PAGE
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheets at March 31, 2021 (unaudited) and September 30, 2020
3
Condensed consolidated unaudited statements of operations for the three and six months ended March 31, 2021 and 2020
4
Condensed consolidated unaudited statements of shareholders’ equity for the three and six months ended March 31, 2021 and 2020
5
Condensed consolidated unaudited statements of cash flows for the six months ended March 31, 2021 and 2020
6
Notes to condensed consolidated unaudited financial statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
21
Item 4. Controls and Procedures
22
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
23
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
2
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2021 and September 30, 2020
March
September
2021
2020
(Unaudited)
ASSETS
Current assets:
Cash
$
616,109
661,195
Accounts receivable, less allowance for doubtful accounts of $0.9 million at March 2021 and September 2020
32,883,402
34,278,429
Inventories, net
81,088,400
98,971,773
Income taxes receivable
85,705
—
Prepaid and other current assets
6,188,097
2,091,645
Total current assets
120,861,713
136,003,042
Property and equipment, net
16,670,297
17,497,274
Operating lease right-of-use assets, net
17,588,664
18,936,126
Note receivable
3,500,000
Goodwill
4,436,950
Other intangible assets, net
500,000
Equity method investment
7,606,925
6,744,095
Other assets
360,459
383,786
Total assets
171,525,008
188,001,273
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
22,553,918
22,108,299
Accrued expenses
8,737,907
8,306,160
Accrued wages, salaries and bonuses
3,656,777
4,761,020
Income taxes payable
567,408
Current operating lease liabilities
5,744,143
5,607,098
Current maturities of long-term debt
516,189
516,850
Total current liabilities
41,208,934
41,866,835
Credit facility
42,109,177
61,971,682
Deferred income tax liability, net
1,854,823
1,806,575
Long-term operating lease liabilities
12,438,764
14,028,606
Long-term debt, less current maturities
5,371,889
2,608,794
Other long-term liabilities
757,387
927,241
Shareholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized
Common stock, $.01 par value, 3,000,000 shares authorized, 551,369 shares outstanding at March 2021 and 537,715 shares outstanding at September 2020
8,834
8,697
Additional paid-in capital
24,917,765
24,282,058
Retained earnings
73,724,722
71,362,334
Treasury stock at cost
(30,867,287)
(30,861,549)
Total shareholders’ equity
67,784,034
64,791,540
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
Condensed Consolidated Unaudited Statements of Operations
for the three and six months ended March 31, 2021 and 2020
For the three months ended March
For the six months ended March
Sales (including excise taxes of $92.0 million and $87.5 million, and $192.5 million and $181.5 million, respectively)
378,513,490
337,886,516
783,258,263
697,987,619
Cost of sales
355,540,704
317,193,063
736,823,498
656,449,455
Gross profit
22,972,786
20,693,453
46,434,765
41,538,164
Selling, general and administrative expenses
19,022,167
18,512,890
37,621,983
37,465,626
Depreciation and amortization
779,925
790,901
1,554,210
1,516,361
19,802,092
19,303,791
39,176,193
38,981,987
Operating income
3,170,694
1,389,662
7,258,572
2,556,177
Other expense (income):
Interest expense
310,543
387,263
686,973
859,686
Other (income), net
(84,265)
(29,920)
(126,088)
(36,697)
226,278
357,343
560,885
822,989
Income from operations before income taxes
2,944,416
1,032,319
6,697,687
1,733,188
Income tax expense
829,000
333,000
1,840,000
582,000
Equity method investment earnings, net of tax
313,492
648,831
Net income available to common shareholders
2,428,908
699,319
5,506,518
1,151,188
Basic earnings per share available to common shareholders
4.41
1.24
10.02
2.04
Diluted earnings per share available to common shareholders
4.33
1.22
9.87
2.02
Basic weighted average shares outstanding
551,369
565,697
549,729
564,129
Diluted weighted average shares outstanding
560,941
571,852
557,741
569,856
Dividends declared and paid per common share
5.18
0.46
5.36
0.64
Condensed Consolidated Unaudited Statements of Shareholders’ Equity
Additional
Common Stock
Treasury Stock
Paid-in
Retained
Shares
Amount
Capital
Earnings
Total
THREE MONTHS ENDED MARCH 2020
Balance, January 1, 2020
869,367
8,692
(303,534)
(28,840,011)
24,192,954
66,592,637
61,954,272
Dividends on common stock, $0.18 per share
(107,056)
Compensation expense and issuance of stock in connection with equity-based awards
31,191
Repurchase of common stock
(307)
(23,643)
Net income
Balance, March 31, 2020
(303,841)
(28,863,654)
24,224,145
67,184,900
62,554,083
THREE MONTHS ENDED MARCH 2021
Balance, January 1, 2021
883,589
(332,220)
25,007,239
71,401,400
65,550,186
(105,586)
(89,474)
Balance, March 31, 2021
SIX MONTHS ENDED MARCH 2020
Balance, October 1, 2019
856,039
8,561
(303,425)
(28,831,855)
23,165,639
66,414,397
60,756,742
Dividends on common stock, $0.64 per share
(380,685)
13,328
131
1,058,506
1,058,637
(416)
(31,799)
SIX MONTHS ENDED MARCH 2021
Balance, October 1, 2020
869,867
(332,152)
Dividends on common stock, $5.36 per share
(3,144,130)
13,722
137
635,707
635,844
(68)
(5,738)
Condensed Consolidated Unaudited Statements of Cash Flows
for the six months ended March 31, 2021 and 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income from operations to net cash flows from (used in)operating activities:
Depreciation
(648,831)
(Gain) loss on sales of property and equipment
(1,374)
33,642
Equity-based compensation
833,624
446,114
Deferred income taxes
48,248
102,163
Provision for losses on doubtful accounts
5,000
390,000
Inventory allowance
110,769
55,746
Other
(42,011)
Changes in assets and liabilities:
Accounts receivable
1,390,027
(3,535,875)
Inventories
17,772,604
17,375,263
(4,096,452)
(100,883)
23,327
(133,074)
429,389
4,401,077
Accrued expenses and accrued wages, salaries and bonuses
(610,589)
(1,432,939)
(169,854)
Income taxes payable and receivable
(867,112)
178,013
Net cash flows from (used in) operating activities
21,279,504
20,404,785
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
(720,567)
(2,245,139)
Proceeds from sales of property and equipment
10,938
Net cash flows from (used in) investing activities
(709,629)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility
771,182,879
680,161,101
Repayments under revolving credit facility
(791,045,384)
(697,319,735)
Proceeds from borrowings on long-term debt
3,000,000
Principal payments on long-term debt
(237,566)
(264,275)
Dividends on common stock
Settlement and withholdings of equity-based awards
(365,022)
Net cash flows from (used in) financing activities
(20,614,961)
(17,835,393)
Net change in cash
(45,086)
324,253
Cash, beginning of period
337,704
Cash, end of period
661,957
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
690,134
927,322
Cash paid during the period for income taxes
2,658,865
301,824
Supplemental disclosure of non-cash information:
Equipment acquisitions classified in accounts payable
16,230
6,583
Issuance of common stock in connection with the vesting and exercise ofequity-based awards
949,812
990,653
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:
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.
FINANCIAL STATEMENTS
The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2020, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended March 31, 2021 and March 31, 2020 have been referred to throughout this quarterly report as Q2 2021 and Q2 2020, respectively. The fiscal balance sheet dates as of March 31, 2021 and September 30, 2020 have been referred to as March 2021 and September 2020, respectively.
ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models, and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for the Company) with early adoption permitted. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The amendments in this update were effective upon issuance for all entities through December 31, 2022. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.
2. INVENTORIES
Inventories in our wholesale segment consisted of finished goods and are stated at the lower of cost or net realizable value, determined on a FIFO basis. Inventories in our retail segment consisted of finished goods and are stated at the lower of cost or market using the retail method. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $0.8 million at March 2021 and $0.7 million at September 2020. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.
8
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at March 2021 and September 2020 was as follows:
Wholesale Segment
Other intangible assets at March 2021 and September 2020 consisted of the following:
Trademarks and tradenames (Retail Segment)
Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. Goodwill recorded on the Company’s consolidated balance sheet represents amounts allocated to its wholesale reporting unit which totaled $4.4 million at both March 2021 and September 2020. The Company performs its annual impairment testing during the fourth fiscal quarter of each year or as circumstances change or necessitate. There have been no material changes to the Company’s impairment assessments since its fiscal year ended September 2020.
4. EQUITY METHOD INVESTMENT
In April 2020, the Company completed a transaction with Chas. M. Sledd Company (“Sledd”), a West Virginia wholesale distributor serving the convenience store industry, to jointly own and operate a limited liability company (“Team Sledd”) formed for the purpose of owning and operating Sledd’s wholesale distribution business. Sledd contributed substantially all of its assets and stated liabilities to Team Sledd, while the Company contributed $10.0 million in cash, of which $6.5 million was structured as equity and $3.5 million was structured as a secured loan to Team Sledd which is subordinate to the liens of Team Sledd's existing secured lenders.
At March 2021, AMCON owned approximately 44% of Team Sledd’s outstanding equity, with a carrying value of $7.6 million. For the three and six months ended March 2021, the Company recognized $0.3 million and $0.6 million, respectively, in equity in earnings (net of income taxes) from its investment in Team Sledd. The Company’s secured loan to Team Sledd had a carrying value of $3.5 million as of March 2021. Pursuant to an operating agreement between the Company and Sledd, it is anticipated that certain membership interests in Team Sledd will be redeemed over a period of years, with such redemptions to be funded from the operations of Team Sledd. These redemptions would result in corresponding increases in the percentage of the outstanding equity of Team Sledd owned by AMCON. During April 2021, subsequent to Q2 2021, certain membership interests in Team Sledd were redeemed, which resulted in AMCON’s ownership of Team Sledd’s outstanding equity increasing to approximately 49%.
Team Sledd’s summarized unaudited financial data for the three and six months ended March 2021 was as follows:
For the three months ended March 2021
For the six months ended March 2021
Sales
158,459,384
323,027,468
7,719,918
15,567,308
Net income before income taxes
941,027
1,944,820
Net income attributable to AMCON, net of tax
5. DIVIDENDS
The Company paid cash dividends on its common stock totaling $3.0 million and $3.1 million for the three and six month periods ended March 31, 2021, respectively, and $0.3 million and $0.4 million for the three and six month periods ended March 31, 2020, respectively.
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.
Basic
Diluted
Weighted average common shares outstanding
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)
9,572
6,155
Weighted average number of shares outstanding
Net earnings per share available to common shareholders
8,012
5,727
7. DEBT
The Company primarily finances its operations through a credit facility agreement (the “Facility”) and long-term debt agreements with banks. The Facility is provided through Bank of America acting as the senior agent and with BMO Harris Bank (“BMO”) participating in a loan syndication.
CREDIT FACILITY
The Facility included the following significant terms at March 2021:
10
The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at March 2021 was $95.7 million, of which $42.1 million was outstanding, leaving $53.6 million available.
At March 2021, the revolving portion of the Company’s Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was 1.85% at March 2021. For the six months ended March 2021, our peak borrowings under the Facility were $71.7 million, and our average borrowings and average availability under the Facility were $44.8 million and $42.0 million, respectively.
LONG-TERM DEBT
In addition to the Facility, the Company also had the following long term obligations at March 2021.
March 2021
September 2020
Real Estate Loan, interest payable at a fixed rate of 3.625% with monthly installments of principal and interest of $47,399 through February 2025 with remaining principal due March 2025, collateralized by three distribution facilities
4,698,949
1,866,231
Note payable, interest payable at a fixed rate of 4.50% with quarterly installments of principal and interest of $49,114 through June 2023 with remaining principal due September 2023
1,189,129
1,259,413
5,888,078
3,125,644
Less current maturities
(516,189)
(516,850)
Cross Default and Co-Terminus Provisions
The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term loan with BMO (the “Real Estate Loan”) which is also a participant lender on the Company’s revolving line of credit. The Real Estate Loan contains cross default provisions which cause the loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, are in default. There were no such cross defaults at March 2021.
11
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.
The Company has issued a letter of credit for $0.5 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.
8. BUSINESS SEGMENTS
The Company has two reportable business segments: the wholesale distribution of consumer products and the retail sale of health and natural food products. The retail health food stores’ operations are aggregated to comprise the Retail Segment because such operations have similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products and the methods used to sell the products. Included in the “Other” column are intercompany eliminations, and assets held and charges incurred and income earned by our holding company. The segments are evaluated on revenues, gross margins, operating income (loss), and income (loss) before taxes.
Wholesale
Retail
Segment
Consolidated
External revenues:
Cigarettes
255,558,043
Tobacco
61,431,768
Confectionery
19,901,516
Health food
12,306,332
Foodservice & other
29,315,831
Total external revenue
366,207,158
487,004
292,921
Operating income (loss)
4,431,132
661,303
(1,921,741)
58,109
252,434
Income (loss) from operations before taxes
4,425,941
664,193
(2,145,718)
142,275,883
17,673,640
11,575,485
Capital expenditures
186,991
101,294
288,285
External revenue:
228,865,603
51,639,145
18,027,050
12,994,651
26,360,067
324,891,865
443,143
347,758
2,907,818
85,521
(1,603,677)
32,590
354,673
2,902,907
87,760
(1,958,348)
142,552,270
20,835,266
478,777
163,866,313
439,019
349,425
788,444
12
532,147,749
126,277,312
40,066,093
23,453,430
61,313,679
759,804,833
959,697
594,513
10,219,371
546,316
(3,507,115)
87,645
599,328
10,195,201
552,034
(4,049,548)
593,431
143,366
736,797
473,915,657
105,956,693
38,863,912
23,091,146
56,160,211
674,896,473
875,405
640,956
6,556,832
(1,056,785)
(2,943,870)
66,564
793,122
6,522,571
(1,052,392)
(3,736,991)
1,232,700
949,769
2,182,469
9. COMMON STOCK REPURCHASES
The Company did not repurchase any shares of its common stock during the three months ended March 2021 and repurchased a total of 307 shares of its common stock during the three months ended March 2020 for cash totaling less than $0.1 million. The Company repurchased 68 and 416 shares of its common stock during the six months ended March 2021 and March 2020, respectively, for cash totaling less than $0.1 million in each respective period. All repurchased shares were recorded in treasury stock at cost.
10. IMPACT OF COVID-19
In March 2020, the World Health Organization (WHO) declared the novel strain of coronavirus (COVID-19) a global pandemic. Since that time, the Company has been designated as a critical infrastructure supplier to the Convenience Store Industry and both of its business segments have continued to operate as essential suppliers of goods and services. In response to the pandemic, the Company has undertaken a range of precautionary steps to ensure the safety of its employees, customers and suppliers, including the frequent cleaning and disinfection of workspaces, property and equipment, instituting social distancing measures, and mandating remote working environments for certain employees.
The Company continues to monitor medical, regulatory, consumer, and community-based regulations. While some COVID-19 restrictions have eased, the operating environment remains fluid and we cannot predict the long-term impact of the pandemic on our business or results of operations. Accordingly, future disruptions to consumer demand or our supply chain and/or our ability to procure products or fulfill orders, could negatively impact our financial position.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect(s),” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions.
It should be understood that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:
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
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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, 2020, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the six months ended March 2021.
SECOND FISCAL QUARTER 2021 (Q2 2021)
The following discussion and analysis includes the Company’s results of operations for the three and six months ended March 2021 and March 2020:
Retail Segment
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
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established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. EOM has a total of eight locations in Florida.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH:
Incr (Decr)
% Change
CONSOLIDATED:
Sales(1)
40,626,974
12.0
38,347,641
12.1
2,279,333
11.0
Gross profit percentage
6.1
%
Operating expense
498,301
2.6
1,781,032
128.2
(76,720)
(19.8)
496,000
148.9
1,729,589
247.3
BUSINESS SEGMENTS:
41,315,293
12.7
18,279,542
16,159,058
2,120,484
13.1
5.0
(688,319)
(5.3)
4,693,244
4,534,395
158,849
3.5
38.1
34.9
SALES
Changes in sales are driven by two primary components:
SALES – Q2 2021 vs. Q2 2020
Sales in our Wholesale Segment increased $41.3 million during Q2 2021 as compared to Q2 2020. Significant items impacting sales during Q2 2021 included a $16.3 million increase in sales related to price increases implemented by cigarette manufacturers, a $10.4 million increase in sales related to the volume and mix of cigarette cartons sold, and a $14.6 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”). Sales in our Wholesale Segment continue to benefit from higher consumer demand across a range of product categories.
Sales in our Retail Segment decreased $0.7 million during Q2 2021 as compared to Q2 2020. This decrease was primarily due to lower sales volumes in our existing stores as customers restocked their home pantries near the end of Q2 2020 in response to the onset of the COVID-19 pandemic.
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GROSS PROFIT – Q2 2021 vs. Q2 2020
Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.
Gross profit in our Wholesale Segment increased $2.1 million during Q2 2021 as compared to Q2 2020. Significant items impacting gross profit during Q2 2021 included a $1.7 million increase in gross profit related to higher sales volumes and promotions in our Other Products category and a $0.4 million increase in gross profit related to the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment increased $0.2 million during Q2 2021 as compared to Q2 2020. This change was primarily related to higher gross margins in our existing stores resulting from improved operational efficiencies and variations in volume and product mix between the comparative periods, partially offset by the impact of overall lower sales volumes in our existing stores compared to the prior year period.
OPERATING EXPENSE – Q2 2021 vs. Q2 2020
Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q2 2021 operating expenses increased $0.5 million as compared to Q2 2020. Significant items impacting operating expenses during Q2 2021 included a $0.7 million increase in employee compensation and benefit costs and a $0.5 million increase in health insurance costs. These increases were partially offset by a $0.4 million decrease in our Retail Segment expenses primarily related to closure of one non-performing store in our Midwest market during the prior fiscal period and reductions in other operating expenses.
INCOME TAX EXPENSE – Q2 2021 vs. Q2 2020
The change in the Q2 2021 income tax rate as compared to Q2 2020 was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.
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RESULTS OF OPERATIONS – SIX MONTHS ENDED MARCH:
85,270,644
12.2
80,374,043
4,896,601
11.8
5.9
6.0
Operating expenses
194,206
0.5
4,702,395
184.0
(172,713)
(20.1)
1,258,000
216.2
4,355,330
378.3
84,908,360
12.6
37,646,883
33,745,852
3,901,031
11.6
362,284
1.6
8,787,882
7,792,312
995,570
12.8
37.5
33.7
SALES – Six months ended March 2021
Sales in our Wholesale Segment increased $84.9 million for the six months ended March 2021 as compared to the same prior year period. Significant items impacting sales during the period included a $30.8 million increase in sales related to price increases implemented by cigarette manufacturers, a $27.4 million increase in sales related to the volume and mix of cigarette cartons sold, and a $26.7 million increase in sales related to higher sales volumes in our Other Products category. Sales in our Retail Segment increased $0.4 million for the six months ended March 2021 as compared to the same prior year period. Of this increase, approximately $0.6 million related to higher sales volumes in our existing stores, partially offset by a $0.2 million decrease in sales volume related to the closure of one non-performing store in our Midwest market during the prior fiscal period which was nearing the end of its lease term. Fiscal 2021 sales in both of our business segments continue to benefit from higher consumer demand across a range of product categories.
GROSS PROFIT – Six months ended March 2021
Gross profit in our Wholesale Segment increased $3.9 million for the six months ended March 2021 as compared to the same prior year period. Significant items impacting gross profit during the period included a $2.9 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.5 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods and a $0.5 million increase in gross profit related to the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment increased $1.0 million for the six months ended March 2021 as compared to the same prior year period. This change was primarily related to higher sales and gross margins in our existing stores resulting from improved operational efficiencies and variations in volume and product mix between the comparative periods, partially offset by the closure of one non-performing store in our Midwest market during the prior year period.
OPERATING EXPENSE – Six months ended March 2021
Operating expenses increased $0.2 million during the six months ended March 2021 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $1.3 million increase in employee
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compensation and benefit costs and a $0.4 million increase in health and other insurance costs. These increases were partially offset by a $0.4 million decrease in bad debt expense, a $0.3 million reduction in fuel costs, a $0.2 million decrease in other Wholesale Segment operating expenses, and a $0.6 million decrease in our Retail Segment operating expenses primarily related to closure of one non-performing store in our Midwest market during the prior fiscal period and reductions in other store operating expenses.
INCOME TAX EXPENSE – Six month ended March 2021
The change in the six months ended March 2021 income tax rate as compared to the same prior year period was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s variability in cash flows from operating activities is dependent on the timing of inventory purchases and seasonal fluctuations. For example, periodically we have inventory “buy-in” opportunities which offer more favorable pricing terms. As a result, we may have to hold inventory for a period longer than the payment terms. This generates a cash outflow from operating activities which we expect to reverse in later periods. Additionally, during our peak time of operations in the warm weather months, we generally carry higher amounts of inventory to ensure high fill rates and customer satisfaction.
In general, the Company finances its operations through a credit facility agreement (the “Facility”) with Bank of America acting as the senior agent and with BMO Harris Bank (“BMO”) participating in the loan syndication. The Facility included the following significant terms at March 2021:
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The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term Real Estate Loan with BMO which is also a participant lender on the Company’s revolving line of credit. The Real Estate Loan contains cross default provisions which cause the loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, are in default. There were no such cross defaults at March 2021. In addition, the Real Estate Loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.
Dividend Payments
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.
Not applicable.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2021 was made under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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.
(a) Exhibits
31.1
Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, pursuant to section 302 of the Sarbanes-Oxley Act
31.2
Certification by Charles J. Schmaderer, Vice President, Chief Financial Officer and Secretary, pursuant to section 302 of the Sarbanes-Oxley Act
32.1
Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, furnished pursuant to section 906 of the Sarbanes-Oxley Act
32.2
Certification by Charles J. Schmaderer, Vice President, Chief Financial Officer and Secretary, furnished pursuant to section 906 of the Sarbanes-Oxley Act
101
Interactive Data File (filed herewith electronically)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: April 19, 2021
/s/ Christopher H. Atayan
Christopher H. Atayan,
Chief Executive Officer and Chairman
/s/ Charles J. Schmaderer
Charles J. Schmaderer,
Vice President, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
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