Amcon Distributing Co 10-Q for FY2023 Q1
Amcon Distributing Co (DIT)
About this 10-Q
Amcon Distributing Co filed this 10-Q on January 18, 2023, covering the quarter ended December 31, 2022 (FY2023 Q1).
Headline figures
Quarter ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $565.99M
- up 33.9% from $422.57M a year earlier
- Net income
- $2.63M
- down 12.4% from net income of $3M a year earlier
- Diluted EPS
- $4.46
- down 13.9% from $5.18 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| |
| For the quarterly period ended |
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
(Exact name of registrant as specified in its charter)
| | |
| ||
(State or other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification No.) |
| | |
| ||
(Address of principal executive offices) | | (Zip code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
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.
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)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ | Accelerated filer ◻ | | |
| | | |
Smaller reporting 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
Form 10-Q
1st Quarter
INDEX
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2022 and September 30, 2022
| | December | | September | ||
|
| 2022 |
| 2022 | ||
| | (Unaudited) | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash | | $ | | | $ | |
Accounts receivable, less allowance for doubtful accounts of $ | |
| | |
| |
Inventories, net | |
| | |
| |
Income taxes receivable | | | | | | |
Prepaid expenses and other current assets | |
| | |
| |
Total current assets | |
| | |
| |
| | | | | | |
Property and equipment, net | |
| | |
| |
Operating lease right-of-use assets, net | | | | | | |
Goodwill | |
| | |
| |
Other intangible assets, net | |
| | |
| |
Other assets | |
| | |
| |
Total assets | | $ | | | $ | |
| | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | | | $ | |
Accrued expenses | |
| | |
| |
Accrued wages, salaries and bonuses | |
| | |
| |
Current operating lease liabilities | | | | | | |
Current maturities of long-term debt | |
| | |
| |
Current mandatorily redeemable non-controlling interest | | | | | | |
Total current liabilities | |
| | |
| |
| | | | | | |
Credit facilities | |
| | |
| |
Deferred income tax liability, net | |
| | |
| |
Long-term operating lease liabilities | | | | | | |
Long-term debt, less current maturities | |
| | |
| |
Mandatorily redeemable non-controlling interest, less current portion | | | | | | |
Other long-term liabilities | |
| | |
| |
| | | | | | |
Shareholders’ equity: | | | | | | |
Preferred stock, $ | |
| |
| ||
Common stock, $ | |
| | |
| |
Additional paid-in capital | |
| | |
| |
Retained earnings | |
| | |
| |
Treasury stock at cost | |
| ( | |
| ( |
Total shareholders’ equity | | | | | | |
Total liabilities and shareholders’ equity | | $ | | | $ | |
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, 2022 and 2021
| | For the three months ended December | ||||
|
| 2022 |
| 2021 | ||
Sales (including excise taxes of $ | | $ | | | $ | |
Cost of sales | |
| | |
| |
Gross profit | |
| | |
| |
Selling, general and administrative expenses | |
| | |
| |
Depreciation and amortization | |
| | |
| |
| |
| | |
| |
Operating income | |
| | |
| |
| | | | | | |
Other expense (income): | | | | | | |
Interest expense | |
| | |
| |
Change in fair value of mandatorily redeemable non-controlling interest | | | ( | | | — |
Other (income), net | |
| ( | |
| ( |
| |
| | |
| |
Income from operations before income taxes | |
| | |
| |
Income tax expense | |
| | |
| |
Equity method investment earnings, net of tax | |
| — | |
| |
Net income available to common shareholders | | $ | | | $ | |
| | | | | | |
Basic earnings per share available to common shareholders | | $ | | | $ | |
Diluted earnings per share available to common shareholders | | $ | | | $ | |
| | | | | | |
Basic weighted average shares outstanding | |
| | |
| |
Diluted weighted average shares outstanding | |
| | |
| |
| |
| | | | |
Dividends paid per common share | | $ | | | $ | |
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, 2022 and 2021
| | | | | | | | | | | | Additional | | | | | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | | | ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total | |||||
THREE MONTHS ENDED DECEMBER 2021 | | | | | | | | | | | | | | | | | | | |
Balance, October 1, 2021 | | | | $ | | | ( | | $ | ( | | $ | | | $ | | | $ | |
Dividends on common stock, $ | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Compensation expense and settlement of equity-based awards | | | | | | | — | | | — | | | | | | — | | | |
Net income available to common shareholders | | — | |
| — | | — | | | — | | | — | | | | | | |
Balance, December 31, 2021 | | | | $ | | | ( | | $ | ( | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | | | |
THREE MONTHS ENDED DECEMBER 2022 | | | | | | | | | | | | | | | | | | | |
Balance, October 1, 2022 | | | | $ | | | ( | | $ | ( | | $ | | | $ | | | $ | |
Dividends on common stock, $ | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Compensation expense and settlement of equity-based awards | | | | | | | — | | | — | | | | | | — | | | |
Net income available to common shareholders | | — | |
| — | | — | | | — | | | — | | | | | | |
Balance, December 31, 2022 | | | | $ | | | ( | | $ | ( | | $ | | | $ | | | $ | |
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, 2022 and 2021
| | December | | December | ||
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income available to common shareholders | | $ | | | $ | |
Adjustments to reconcile net income available to common shareholders to net cash flows from (used in) operating activities: | | | | | | |
Depreciation | | | | | | |
Amortization | | | | | | — |
Equity method investment earnings, net of tax | | | — | | | ( |
(Gain) loss on sales of property and equipment | | | ( | | | ( |
Equity-based compensation | | | | | | |
Deferred income taxes | | | | | | |
Provision for losses on doubtful accounts | | | ( | | | ( |
Inventory allowance | | | | | | |
Change in fair value of mandatorily redeemable non-controlling interest | | | ( | | | — |
Changes in assets and liabilities: | | | | | | |
Accounts receivable | | | | | | |
Inventories | | | ( | | | ( |
Prepaid and other current assets | | | | | | ( |
Other assets | | | | | | |
Accounts payable | | | ( | | | ( |
Accrued expenses and accrued wages, salaries and bonuses | | | ( | | | ( |
Other long-term liabilities | | | | | | ( |
Income taxes payable and receivable | | | | | | |
Net cash flows from (used in) operating activities | | | ( | | | ( |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Purchase of property and equipment | | | ( | | | ( |
Proceeds from sales of property and equipment | | | | | | |
Principal payment received on note receivable | | | — | | | |
Net cash flows from (used in) investing activities | | | ( | | | ( |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Borrowings under revolving credit facilities | | | | | | |
Repayments under revolving credit facilities | | | ( | | | ( |
Principal payments on long-term debt | | | ( | | | ( |
Dividends on common stock | | | ( | | | ( |
Settlement and withholdings of equity-based awards | | | — | | | ( |
Net cash flows from (used in) financing activities | | | | | | |
Net change in cash | | | | | | |
Cash, beginning of period | | | | | | |
Cash, end of period | | $ | | | $ | |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid during the period for interest | | $ | | | $ | |
| | | | | | |
Supplemental disclosure of non-cash information: | | | | | | |
Equipment acquisitions classified in accounts payable | | $ | | | $ | |
Dividends declared, not paid | | | | | | — |
Issuance of common stock in connection with the vesting and exercise of | | | | |
| |
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
| ● | 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 |
| ● | Our retail health food segment (“Retail Segment”) operates |
WHOLESALE SEGMENT
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately
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
As previously disclosed, the Company entered into an asset purchase agreement with Henry’s Foods, Inc. (“Henry’s”), under which the Company agreed to purchase substantially all of Henry’s wholesale distribution assets for approximately $
RETAIL SEGMENT
Our Retail Segment, through our Healthy Edge Retail Group 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
FINANCIAL STATEMENTS
The Company’s fiscal year ends on September 30th, except for one non-wholly owned subsidiary whose fiscal year ends on the last Friday of September. 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, 2022, 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 consolidated subsidiaries. Additionally, the three month fiscal periods ended December 31, 2022 and December 31, 2021 have been referred to throughout this Quarterly Report as Q1 2023 and Q1 2022, respectively. The fiscal balance sheet dates as of December 31, 2022 and September 30, 2022 have been referred to as December 2022 and September 2022, respectively.
ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models, and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for the Company) with early adoption permitted. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.
2. INVENTORIES
Inventories in our Wholesale Segment consisted of finished goods and are stated at the lower of cost or net realizable value, determined on a FIFO basis. Inventories in our Retail Segment consisted of finished goods and are stated at the lower of cost or market using the retail method. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at December 2022 and September 2022 was as follows:
|
| December |
| September | ||
| 2022 | | 2022 | |||
Wholesale Segment | | $ | | | $ | |
8
Other intangible assets at December 2022 and September 2022 consisted of the following:
|
| December |
| September | ||
| | 2022 | | 2022 | ||
Customer list (Wholesale Segment) (less accumulated amortization of $ | | $ | | | $ | |
Non-competition agreement (Wholesale Segment) (less accumulated amortization of less than $ | | | | | | |
Trademarks and tradenames (Retail Segment) | | | | | | |
| | $ | | | $ | |
Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been recorded on these assets. Goodwill recorded on the Company’s consolidated balance sheets represent amounts allocated to its wholesale reporting unit which totaled approximately $
At December 2022, identifiable intangible assets considered to have finite lives were represented by a customer list which is being amortized over
Estimated future amortization expense related to identifiable intangible assets with finite lives was as follows at December 2022:
| | December | |
|
| 2022 | |
Fiscal 2023 (1) | | $ | |
Fiscal 2024 | | | |
Fiscal 2025 | | | |
Fiscal 2026 | | | |
Fiscal 2027 | | | |
Fiscal 2028 and thereafter | | | |
| | $ | |
| (1) | Represents amortization for the remaining nine months of Fiscal 2023. |
4. DIVIDENDS
The Company paid a $
9
5. EARNINGS PER SHARE
Basic earnings per share available to common shareholders is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing net income available to common shareholders by the sum of the weighted average number of common shares outstanding and the weighted average dilutive equity awards.
| | | | | | | | | | | | |
| | For the three months ended December | ||||||||||
| | 2022 | | 2021 | ||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Weighted average number of common shares outstanding | | | | | | | | | | | | |
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | | | — | | | | | | — | | | |
Weighted average number of shares outstanding | | | | | | | | | | | | |
Net income available to common shareholders | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | |
Net earnings per share available to common shareholders | | $ | | | $ | | | $ | | | $ | |
| (1) | Diluted earnings per share calculation includes all equity-based awards deemed to be dilutive. |
6. DEBT
The Company primarily finances its operations through
The amount available for use from the Facilities at any given time is subject to a number of factors, including eligible accounts receivable and inventory balances that fluctuate day-to-day, as well as the value of certain real estate collateral. Based on the collateral and loan limits as defined in the Facility agreements, the credit limit of the combined Facilities at December 2022 was $
The average interest rate of the Facilities was
Cross Default and Co-Terminus Provisions
Team Sledd’s
Other
The Company has issued a letter of credit for $
10
7. INCOME TAXES
The change in the Company’s effective income tax rate for the three month period ended December 2022 as compared to the respective prior year period, was primarily related to non-deductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.
8. MANDATORILY REDEEMABLE NON-CONTROLLING INTEREST
Mandatorily redeemable non-controlling interest (“MRNCI”) recorded on the Company’s consolidated balance sheet represents the non-controlling interest in the Company’s strategic investment in Team Sledd, LLC (“Team Sledd”). The Company owned approximately
Fair value of MRNCI as of September 2022 |
| $ | |
Distributions to non-controlling interest | | | — |
Change in fair value | | | ( |
Fair value of MRNCI as of December 2022 | | $ | |
Less current portion at fair value | | | ( |
| | $ | |
9. EQUITY-BASED INCENTIVE AWARDS
The Company has
11
Restricted Stock Units
At December 2022, 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 | |
Date of award: |
| | October 2020 |
Original number of awards issued: |
| | |
Service period: |
| | |
Estimated fair value of award at grant date: | | $ | |
Non-vested awards outstanding at December 2022: | | | |
Fair value of non-vested awards at December 2022 of approximately: | | $ | |
(1) |
There is
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 under “ASC 718 – Compensation – Stock Compensation”.
The following summarizes restricted stock unit activity under the Omnibus Plans during Q1 2023:
| | Number | | Weighted | |
| | of | | Average | |
|
| Shares |
| Fair Value | |
Nonvested restricted stock units at September 2022 |
| | | $ | |
Granted |
| — | | | — |
Vested |
| ( | | | |
Expired |
| — | | | — |
Nonvested restricted stock units at December 2022 |
| | | $ | |
Restricted Stock Awards
At December 2022, the Compensation Committee of the Board of Directors had authorized and approved the following restricted stock awards to members of the Company’s management team pursuant to the provisions of the Company’s Omnibus Plans:
|
| Restricted | | Restricted | ||
Date of award: |
| | October 2021 | | | October 2022 |
Original number of awards issued: |
| | | | ||
Service period: |
| | | | ||
Estimated fair value of award at grant date: | | $ | | | ||
Non-vested awards outstanding at December 2022: | | | | | ||
Fair value of non-vested awards at December 2022 of approximately: | | $ | | | ||
(1) |
(2) | The |
12
There is
The following summarizes restricted stock award activity under the Omnibus Plans during Q1 2023:
| | Number | | Weighted | |
| | of | | Average | |
|
| Shares |
| Fair Value | |
Nonvested restricted stock awards at September 2022 |
| | | $ | |
Granted |
| | | | |
Vested |
| ( | | | |
Expired |
| — | | | — |
Nonvested restricted stock awards at December 2022 |
| | | $ | |
All Equity-Based Awards (restricted stock units and restricted stock awards)
Net income before income taxes included compensation expense of approximately $
10. BUSINESS SEGMENTS
The Company has
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
THREE MONTHS ENDED DECEMBER 2022 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | | | $ | — | | $ | — | | $ | |
Tobacco | | | | | | — | | | — | | | |
Confectionery | | | | | | — | | | — | | | |
Health food | | | — | | | | | | — | | | |
Foodservice & other | | | | | | — | | | — | | | |
Total external revenue | | | | | | | | | — | | | |
Depreciation | | | | | | | | | — | | | |
Amortization | | | | | | — | | | — | | | |
Operating income (loss) | | | | | | ( | | | ( | | | |
Interest expense | | | | | | — | | | | | | |
Income (loss) from operations before taxes | | | | | | ( | | | ( | | | |
Total assets | | | | | | | | | | | | |
Capital expenditures | | | | | | | | | — | | | |
13
| | Wholesale | | Retail | | | | | ||||
|
| Segment |
| Segment |
| Other |
| Consolidated | ||||
THREE MONTHS ENDED DECEMBER 2021 | | | | | | | | | | | | |
External revenue: | | | | | | | | | | | | |
Cigarettes | | $ | | | $ | — | | $ | — | | $ | |
Tobacco | | | | | | — | | | — | | | |
Confectionery | | | | | | — | | | — | | | |
Health food | | | — | | | | | | — | | | |
Foodservice & other | | | | | | — | | | — | | | |
Total external revenue | | | | | | | | | — | | | |
Depreciation | | | | | | | | | — | | | |
Operating income (loss) | | | | | | | | | ( | | | |
Interest expense | | | | | | — | | | | | | |
Income (loss) from operations before taxes | | | | | | | | | ( | | | |
Equity method investment earnings, net of tax | | | — | | | — | | | | | | |
Total assets | | | | | | | | | | | | |
Capital expenditures | | | | | | | | | — | | | |
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS UPDATE
Our businesses continue to be impacted by a number of macro-economic factors including ongoing disruptions to global supply chains and product availability. These factors, combined with a highly inflationary operating environment have resulted in cost pressures across our business segments as product, labor, fuel, interest and other costs have all increased markedly, while at the same time pressuring consumer discretionary spending and impacting retail demand trends.
We continue to closely monitor proposals from governmental and regulatory bodies including the United States Food and Drug Administration (“FDA”) which are evaluating the prohibition and/or limitations on the sale of certain cigarette (menthol flavored) tobacco and vaping products. If such regulations were to be implemented, they would have a negative impact on the Company’s financial results.
As previously disclosed, the Company entered into an asset purchase agreement with Henry’s Foods, Inc. (“Henry’s”), under which the Company agreed to purchase substantially all of Henry’s wholesale distribution assets for approximately $30.3 million plus any working capital adjustments. The Company expects to fund the purchase with borrowings from its existing bank group. The transaction is expected to close during the Company’s second fiscal quarter of 2023.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect(s),” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions.
It should be understood that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:
| ● | risks associated with an inflationary operating environment, particularly as it relates to wages, fuel, interest and commodity prices which impact our operating cost structure and 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 vaping products by the FDA, state or local governmental agencies, or other parties, including proposed forthcoming regulations around the manufacture and distribution of certain menthol and flavored tobacco products, |
| ● | risks associated with the threat or occurrence of epidemics or pandemics (such as COVID-19 or its variants) or other public health issues, including the continued health of our employees and management, the reduced demand for our goods and services or increased credit risk from customer credit defaults resulting from an economic downturn, |
| ● | risks associated with the imposition of governmental orders restricting our operations and the operations of our suppliers and customers, in particular, disruptions to our supply chain or our ability to procure products or fulfill orders due to labor shortages in our warehouse operations, |
| ● | risks associated with the Company’s business model, which since the onset of the COVID-19 pandemic has experienced both higher sales volumes and labor costs, and the related risk of sales returning to more historical levels without the Company being able to offset increases in its cost structure, |
15
| ● | 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 consummating such transactions on expected terms or timing, purchase price and business valuation and recording 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 that ongoing, decreasing, or changing trade tariff and trade policies may have on our product costs or on consumer disposable income and demand, |
| ● | increasing product and operational costs resulting from ongoing supply chain disruptions, an intensely competitive labor market with a limited pool of qualified workers, and higher incremental costs associated with the handling and transportation of certain product categories such as foodservice, |
| ● | increases in state and federal excise taxes on cigarette and tobacco products and the potential impact on demand, particularly as it relates to current legislation under consideration which could significantly increase such taxes, |
| ● | risks associated with disruptions to our technology systems or those of third parties upon which we rely, including security breaches, cyber-attacks, malware, or other methods by which such information systems could be compromised, |
| ● | increases in inventory carrying costs and customer credit risks, |
| ● | changes in pricing strategies and/or promotional/incentive programs offered by cigarette and tobacco manufacturers, |
| ● | changing demand for the Company’s products, particularly cigarette, tobacco and vaping products, |
| ● | risks that product manufacturers may begin selling directly to convenience stores and bypass wholesale distributors, |
| ● | changes in laws and regulations and ongoing compliance related to health care and associated insurance, |
| ● | increasing health care costs for both the Company and consumers and its potential impact on discretionary consumer spending, |
| ● | decreased availability of capital resources, |
| ● | domestic regulatory and legislative risks, |
| ● | poor weather conditions, and the adverse effects of climate change, |
| ● | consolidation trends within the convenience store, wholesale distribution, and retail health food industries, |
| ● | natural disasters and domestic or political unrest, or any restrictions, regulations, or security measures implemented by governmental bodies in response to these items, and |
| ● | other risks over which the Company has little or no control, and any other factors not identified herein. |
16
Changes in these factors could result in significantly different results. Consequently, future results may differ from management’s expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward-looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward-looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company’s condensed consolidated unaudited financial statements (“financial statements”) require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2022, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these estimates and related policies during the three months ended December 2022.
FIRST FISCAL QUARTER 2023 (Q1 2023)
The following discussion and analysis includes the Company’s results of operations for the three months ended December 2022 and December 2021:
Wholesale Segment
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 5,400 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 2022, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.
Our Wholesale Segment offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, inventory optimization and merchandising expertise, information systems, and accessing trade credit.
Our Wholesale Segment operates seven distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia (operated by our Team Sledd, LLC subsidiary). These distribution centers, combined with cross-dock facilities, include approximately 885,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellogg’s, Kraft Heinz, 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 Retail Group 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.
17
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 nineteen retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akin’s”), and Earth Origins Market (“EOM”). These stores carry over 35,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER:
|
| 2022 |
| 2021 |
| Incr (Decr) |
| % Change | |||
CONSOLIDATED: | | | | | | | | | | | |
Sales (1) | | $ | 565,989,507 | | $ | 422,571,278 | | $ | 143,418,229 |
| 33.9 |
Cost of sales | |
| 531,019,924 | |
| 395,638,615 | |
| 135,381,309 |
| 34.2 |
Gross profit | |
| 34,969,583 | |
| 26,932,663 | |
| 8,036,920 |
| 29.8 |
Gross profit percentage | |
| 6.2 | % |
| 6.4 | % |
| | | |
| | | | | | | | | | | |
Operating expense | | $ | 29,450,072 | | $ | 23,174,985 | | $ | 6,275,087 |
| 27.1 |
Operating income | |
| 5,519,511 | |
| 3,757,678 | |
| 1,761,833 |
| 46.9 |
Interest expense | |
| 1,694,158 | |
| 322,097 | |
| 1,372,061 |
| 426.0 |
Change in fair value of mandatorily redeemable non-controlling interest | | | (54,916) | | | — | | | (54,916) | | N/A |
Income tax expense | |
| 1,304,800 | |
| 1,245,000 | |
| 59,800 |
| 4.8 |
Equity method investment earnings, net of tax | | | — | | | 770,365 | | | (770,365) | | (100.0) |
Net income available to common shareholders | |
| 2,629,001 | |
| 3,001,055 | |
| (372,054) |
| (12.4) |
| | | | | | | | | | | |
BUSINESS SEGMENTS: | | | | | | | | | | | |
Wholesale | | | | | | | | | | | |
Sales | | $ | 555,727,634 | | $ | 410,646,073 | | $ | 145,081,561 |
| 35.3 |
Gross profit | |
| 31,275,260 | |
| 22,378,803 | |
| 8,896,457 |
| 39.8 |
Gross profit percentage | |
| 5.6 | % |
| 5.4 | % |
| | | |
Retail | | | | | | | | | | | |
Sales | | $ | 10,261,873 | | $ | 11,925,205 | | $ | (1,663,332) |
| (13.9) |
Gross profit | |
| 3,694,323 | |
| 4,553,860 | |
| (859,537) |
| (18.9) |
Gross profit percentage | |
| 36.0 | % |
| 38.2 | % |
| | | |
| (1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $8.9 million in Q1 2023 and $7.0 million in Q1 2022. |
18
SALES
Changes in sales are driven by two primary components:
| (i) | changes to selling prices, which are largely controlled by our product suppliers, and excise taxes imposed on cigarettes and tobacco products by various states; and |
| (ii) | changes in the volume and mix of products sold to our customers, either due to a change in purchasing patterns resulting from consumer preferences or the fluctuation in the comparable number of business days in our reporting period. |
SALES – Q1 2023 vs. Q1 2022
Sales in our Wholesale Segment increased $145.1 million during Q1 2023 as compared to Q1 2022. Significant items impacting sales during Q1 2023 included a $159.9 million increase in sales related to the acquisition of Team Sledd, LLC (“Team Sledd”) during Q3 2022, a $20.6 million increase in sales related to price increases implemented by cigarette manufacturers, and a $6.4 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), partially offset by a $41.8 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment decreased $1.7 million during Q1 2023 as compared to Q1 2022. This decrease was due to approximately $0.8 million related to the temporary closure of our Port Charlotte store due to damage from Hurricane Ian, $0.4 million related to lower sales volumes in our existing stores and approximately $0.5 million related to the closure of a store in our Florida market during the prior year.
GROSS PROFIT – Q1 2023 vs. Q1 2022
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 $8.9 million during Q1 2023 as compared to Q1 2022. Significant items impacting gross profit during Q1 2023 included a $9.0 million increase in gross profit related to the acquisition of Team Sledd during Q3 2022, a $0.9 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, partially offset by a $0.2 million decrease in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods and a $0.8 million decrease in gross profit related to net impact of cigarette manufacturer promotions and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment decreased $0.9 million during Q1 2023 as compared to Q1 2022. This change was primarily related to a $0.4 million decrease in realized margins in our existing stores, a $0.3 decrease related to the temporary closure of our Port Charlotte store due to damage from Hurricane Ian, and a $0.2 million decrease related to the closure of a store in our Florida market during the prior year.
OPERATING EXPENSE – Q1 2023 vs. Q1 2022
Operating expense includes selling, general and administrative expenses and depreciation. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q1 2023 operating expenses increased $6.3 million as compared to Q1 2022. Significant items impacting operating expenses during Q1 2023 included a $6.9 million increase in operating expenses related to the acquisition of Team Sledd during Q3 2022 and a $0.5 million increase in fuel costs primarily related to higher diesel fuel prices, partially offset by a $0.7 million decrease in other Wholesale Segment operating expenses primarily driven by a decrease in employee compensation and benefit costs, a $0.3 million decrease in our customer bad debt expense and a $0.1 million decrease in operating expenses in our Retail Segment. The decrease in our Retail Segment was related to a $0.2 million decrease related to the closure of a store in the prior year and a $0.1 million decrease related to the temporary closure of
19
our Port Charlotte store due to damage from Hurricane Ian, partially offset by a $0.2 million increase in operating expenses at our existing stores.
INCOME TAX EXPENSE – Q1 2023 vs. Q1 2022
The change in the Q1 2023 income tax rate as compared to Q1 2022 was primarily related non-deductible 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.
The Company primarily finances its operations through two credit facility agreements (the “AMCON Facility” and the “Team Sledd Facility”, and together “the Facilities”) and long-term debt agreements with banks. At December 2022, the Facilities have a total combined borrowing capacity of $250.0 million, which includes provisions for up to $30.0 million in credit advances for certain inventory purchases, which are limited by accounts receivable and inventory qualifications, and the value of certain real estate collateral. The Team Sledd Facility matures in March 2027 and the AMCON Facility matures in June 2027, each without a penalty for prepayment. Obligations under the Facilities are collateralized by substantially all of the Company’s respective equipment, intangibles, inventories, accounts receivable, and in the case of the AMCON Facility, certain of the Company’s real estate. The Facilities each feature an unused commitment fee and financial covenants including fixed charge coverage ratios. Borrowings under the Facilities bear interest at either the bank’s prime rate, the Secured Overnight Financing Rate (“SOFR”) or the London Interbank Offered Rate (“LIBOR”), plus any applicable spreads.
The amount available for use from the Facilities at any given time is subject to a number of factors, including eligible accounts receivable and inventory balances that fluctuate day-to-day, as well as the value of certain real estate collateral. Based on the collateral and loan limits as defined in the Facility agreements, the credit limit of the combined Facilities at December 2022 was $230.8 million, of which $141.5 million was outstanding, leaving $89.3 million available.
The average interest rate of the Facilities was 6.45% at December 2022. For the three months ended December 2022, the peak borrowings under the Facilities was $150.4 million, and the average borrowings and average availability under the Facilities was $114.3 million and $84.3 million, respectively.
As discussed in the Business Update section above, the Company intends to fund the purchase price of the Henry’s transaction with borrowings from its existing banking group.
Cross Default and Co-Terminus Provisions
Team Sledd’s three notes payable and the Team Sledd Facility contain cross default provisions. There were no such cross defaults at December 2022. The Company was in compliance with all of its financial covenants under the Facilities at December 2022.
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 2022 and December 2021. During Q1 2023, the Company declared a $5.00 per share special dividend totaling approximately $3.1 million that was paid in Q2 2023. During Q1 2022, the Company declared and paid a $5.00 per share special dividend totaling approximately $3.0 million.
20
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 our industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.
The Company does not currently hedge its exposure to interest rate risk or fuel costs. Accordingly, significant price movements in these areas can and do impact the Company’s profitability.
While the Company believes its liquidity position going forward will be adequate to sustain operations in both the short- and long-term, a precipitous change in operating environment could materially impact the Company’s future revenue streams as well as its ability to collect on customer accounts receivable or secure bank credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2022 was made under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
21
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
Other than changes implemented to enhance internal controls over the accounting for certain complex financial instruments as described in Item 9A of our most recently filed Form 10-K for the fiscal year ended September 30, 2022, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
22
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, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company issued unregistered securities to certain members of the Company’s management team during the quarterly period ended December 31, 2022, in relation to the vesting and granting of equity awards as described in Note 9 of Part I, Item 1 of this quarterly report on Form 10-Q. These issuances were exempt from registration under Section 4(a)(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
23
Item 6. Exhibits
(a) Exhibits
| | |
| 10.1 | |
| | |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32.1 | |
| | |
| 32.2 | |
| | |
| 101 | Interactive Data File (filed herewith electronically) |
| | |
| 104 | Cover Page Interactive Data File – formatted in Inline XBRL and included as Exhibit 101 |
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AMCON DISTRIBUTING COMPANY |
| (registrant) |
| |
Date: January 18, 2023 | /s/ Christopher H. Atayan |
| Christopher H. Atayan, |
| Chief Executive Officer and Chairman |
| |
Date: January 18, 2023 | /s/ Charles J. Schmaderer |
| Charles J. Schmaderer, |
| Vice President, Chief Financial Officer and Secretary |
| (Principal Financial and Accounting Officer) |
25
Exhibit 10.1
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made and entered into this 7th day of December, 2022, by and among Henry's Foods, Inc., a Minnesota corporation ("HFI"), and The Eidsvold Family LLC, a Minnesota limited liability company ("EFLLC") (HFI and EFLLC collectively are referred to as "Sellers" and each individually is referred to as a "Seller"), Brian Eidsvold, an individual shareholder or member of each Seller ("Brian"), H. Thomas Eidsvold, an individual shareholder of each Seller ("Thomas") (Brian and Thomas collectively are referred to as "Shareholders" and each individually is referred to as a "Shareholder"), and LOL Foods, Inc., a Nebraska corporation ("Buyer").
RECITAL
Each Seller desires to sell to Buyer, and Buyer desires to acquire from each Seller, substantially all of the assets of such Seller (excluding certain specified excluded assets), upon the terms and conditions hereinafter set forth, and Shareholders, being the holders of capital stock or other equity ownership interests of each Seller, desires that each Seller proceed with such sale.
AGREEMENT
In consideration of the above premises, the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
"Accounts Receivable" has the meaning set forth in Section 3.1(c).
"Agreement" means this Asset Purchase Agreement, as amended from time to time by the parties hereto, together with all Schedules and Exhibits hereto.
"Assets" has the meaning set forth in Section 2.1.
"Assumed Contracts" has the meaning set forth in Section 2.1(b).
"Assumed Liabilities" has the meaning set forth in Section 4.2(b) hereof.
"Average Cost" means the cost currently used by Sellers to justify the inventory component of Sellers' borrowing base provisions in Sellers' existing debt agreements with Sellers' current lender, as well as justifying the inventory component of Sellers' financial statements as represented to Buyer.
"Benefit Plans" means any and all pension, retirement, savings, disability, medical, dental, health, life, death benefit, group insurance, profit sharing, deferred compensation, stock options or other stock incentive, bonus incentive, vacation pay, sick pay, severance or termination pay, employment agreement, "cafeteria" or "flexible benefit" plan under Section 125 of the Code, "employee benefit plan" as defined in Section 3(3) of ERISA, or other employee or director benefit plan, trust, arrangement, contract, agreement, policy or commitment, whether formal or informal, written or oral, under which employees or former employees of any Seller with respect to the Business are entitled to participate by reason of their current or prior employment by any Seller.
"Business" means the wholesale distribution and food service business presently conducted by Sellers, including the wholesale distribution of candy, tobacco, paper, grocery and food service products to retail and commercial customers.
"Closing" means the consummation of the transactions contemplated by this Agreement, including the transfer by Sellers to Buyer of the Assets.
"Closing Date" means the date of the Closing established pursuant to Section 4.1 hereof.
"COBRA" means Consolidated Omnibus Budget Reconciliation Act, as amended.
"Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.
"Contracts" means all contracts, agreements, understandings, notes, instruments, leases, subleases, mortgages, licenses, commitments or binding arrangements, express or implied, oral or written, of any kind or nature whatsoever by which any Person is bound, and all amendments thereto.
"Damages" means all damages, losses, costs, obligations, claims, demands, assessments, judgements or liabilities (whether based on contract, tort, product liability, strict liability or otherwise), including Taxes, and all expenses (including interest, penalties and attorneys' and accountants' fees and disbursements.
"Environmental Claims" has the meaning set forth in Section 11.1(b).
"Environmental Law" means any federal, state, local or foreign statute, regulation, ordinance, order, agreement, permit, plan, rule of common law or other legal requirement in any way relating to the protection of human health, the environment and natural resources, or relating to Hazardous Substance handling, treatment, storage, disposal or transportation, or arranging therefor, and all amendments thereto, and any analogous state and local laws and the regulations promulgated pursuant thereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.
"Escrow Agent" means U.S. Bank National Association.
2
"Escrow Agreement" has the meaning set forth in Section 4.3(c).
"Escrow Amount" means Six Hundred and Fifty Thousand Dollars ($650,000).
"Excluded Assets" has the meaning set forth in Section 2.2.
"GAAP" means United States generally accepted accounting principles consistently applied.
"Hazardous Substance" means any substance, material or waste which is regulated, classified, or otherwise characterized under or pursuant to any Environmental Law as "hazardous," "toxic," "pollutant," "contaminant," "radioactive," "biohazard," or words of similar meaning or effect, including petroleum and its compounds and by-products, asbestos, polychlorinated biphenyls, radon, mold or other fungi, and urea formaldehyde insulation.
"Inventory Adjustment" has the meaning set forth in Section 3.1(b).
"IRS" means the United States Internal Revenue Service.
"Knowledge" means (i) with respect to Sellers, all facts and information which are either within the actual knowledge of any of the officers, directors or managers of any Seller, or that should have been known to such persons in the exercise of reasonable care and after due inquiry, and (ii) with respect to Buyer, all facts and information which are either within the actual knowledge of any of the executive officers or directors of Buyer, or that should have been known to such persons in the exercise of reasonable care and after due inquiry.
"Lien" means any lien, pledge, claim, charge, security interest, hypothecation or encumbrance of any nature whatsoever.
"Material Adverse Effect" means with respect to the consequences of any event, fact or circumstance (including the occurrence or non-occurrence of any event, fact or circumstance) applicable to any Seller or the Business, that such event, fact or circumstance has caused, is causing or is reasonably likely to cause, directly, indirectly or consequentially, singularly or in the aggregate with other events, facts or circumstances, any material adverse effect on the Assets or the financial condition, operating results or operations of any Seller or the Business or any Damages in excess of $50,000; provided, however, that in no event shall any of the following changes, in and of themselves, constitute a "Material Adverse Effect": (i) any change resulting from conditions affecting the food service industry generally and which does not have a disproportionate effect on the Business, (ii) any change resulting from general business or economic conditions in the United States which does not have a disproportionate effect on the Business, or (iii) any change resulting from compliance by Sellers with the terms of, or the taking of any action contemplated by, this Agreement.
"Net Cost" means the Average Cost minus certain discounts and adjustments as shown in the report referred to internally by Sellers as the summary inventory on hand report (the inventory valuation report) stated at Net Cost using the same methodology and approach as reflected in the reports provided to Buyer during due diligence.
3
"Ordinary Course of Business" means, with respect to any Person, the ordinary and usual course of normal day-to-day operations of such Person, consistent with such Person’s past practice (including with respect to quantity and frequency), in compliance with all applicable Laws and undertaken by such Person in good faith and not for the purposes of evading any covenant or restriction in this Agreement.
"Organizational Documents" of an entity means (a) (i) if a corporation, its articles of incorporation or certificate of incorporation, as the case may be, and bylaws, (ii) if a limited liability company, its certificate of formation or articles of organization, as the case may be, and limited liability company agreement or operating agreement, as the case may be, (3) if a limited partnership, its certificate of limited partnership and agreement of limited partnership, (4) if a general partnership, its partnership agreement, and (b) any other Contracts relating to the creation, formation, organization, governance or ownership of such entity.
"Permitted Encumbrances" has the meaning set forth in Section 4.2(a).
"Person" means a natural person, partnership, limited partnership, joint venture, corporation, limited liability company, trust, government, government agency and any other legal entity.
"Real Property" means (i) the real property identified on Schedule 2.1(a) hereto, and (ii) the leasehold estates in real property created by the leases and subleases, if any, included among the Contracts listed on Schedule 2.1(b) or Schedule 6.8 hereto.
"Required Financial Statements" has the meaning set forth in Section 8.8.
"Retained Liabilities" has the meaning set forth in Article 5 hereof.
"Specified Litigation" means that certain personal injury lawsuit filed in Pennington County, Minnesota entitled "Tanya Erickson v. Henry's Foods, Inc." (Court File No. 57-CV-22-277).
"Tax" or "Taxes" means all taxes, levies or other similar governmental charges or fees of any kind whatsoever, including all federal, state, local and foreign income, corporation, gross receipts, franchise, capital gains, transfer, registration, sales, use, occupation, property, ad valorem, excise, windfall profits, stamp, payroll, worker's compensation disability, withholding, social security, alternative, add-on and other taxes (whether payable directly or by withholding and whether or not requiring the filing of a tax return), and all estimated taxes, additions to tax, and penalties and interest imposed thereon or with respect thereto.
"Title Company" means a title insurance company selected by Buyer.
"Title Policy" means one or more policies of title insurance under which the Title Company insures, as the case may be, title to, or the leasehold interest in, the Real Property included in the Assets and which conform to the following specifications:
4
"Transition Services" has the meaning set forth in Section 8.4.
5
6
Each Seller shall use commercially reasonable efforts to obtain such consents of third parties as may be necessary for the assignment of any such right by Sellers. To the extent that such right of any Seller is not assignable or where consents to the assignment thereof cannot be obtained as herein provided, Sellers shall, at the Closing, assign to Buyer the full benefit thereof and, at Buyer's request, take such other actions as are reasonable and lawful as to Sellers and Buyer, and which result in the respective benefits and obligations being apportioned between Sellers, on the one hand, and Buyer, on the other hand, in a manner that furthers the purpose and intent of this Agreement.
7
8
9
Anything in this Agreement to the contrary notwithstanding, Sellers shall be responsible for all liabilities and obligations of Sellers and the Business not hereby expressly assumed by Buyer (the "Retained Liabilities"), and Buyer shall not assume, or in any way be liable or responsible for, any liabilities or obligations of any Seller or of the Business, except the Assumed Liabilities. Without limiting the generality of the foregoing, Buyer shall not assume, or in any way be liable or responsible for, the following Retained Liabilities:
10
Sellers and Shareholders hereby, jointly and severally, represent and warrant to Buyer as follows:
11
12
13
14
15
16
17
Buyer hereby represents and warrants to Sellers and Shareholders as follows:
18
19
20
21
22
23
24
Each and every obligation of Buyer to be performed at or before the Closing hereunder is subject, at the Buyer's election, to the satisfaction on or prior to the Closing Date of the conditions set forth below.
25
26
27
Each and every obligation of Sellers to be performed at or before the Closing hereunder is subject, at such party's election, to the satisfaction on or prior to the Closing Date of the conditions set forth below.
28
29
30
31
32
If to Sellers and Shareholders: | If to Buyer: |
Henry’s Foods, Inc. 4597 County Rd 11 NE Alexandria, MN 56308 Attn: Brian Eidsvold With a copy to: Fluegel Anderson McLaughlin & Brutlag 215 Atlantic Ave, PO Box 527 Morris, MN 56267 Attn: Warrenn Anderson Copeland Buhl 800 East Wayzata Blvd, Ste 300 Wayzata, MN 55391 Attn: Nate Lilleodden | LOL Foods, Inc. c/o AMCON Distributing Company 7405 Irvington Road Omaha, NE 68122 Attn: President |
or such other Persons and/or addresses as shall be furnished in writing by any party to the other party, and shall be deemed to have been given only upon its delivery in accordance with this Section 12.3.
33
34
[The remainder of this page intentionally has been left blank]
35
IN WITNESS WHEREOF, the parties hereto have duly executed this Asset Purchase Agreement on the date first above written.
HENRY'S FOODS, INC. By: /s/ Brian Eidsvold Name: Brian Eidsvold Title: Chief Executive Officer | THE EIDSVOLD FAMILY LLC By: /s/ Brian Eidsvold Name: Brian Eidsvold Title: Manager |
| |
/s/ Brian Eidsvold BRIAN EIDSVOLD | /s/ H. Thomas Eidsvold H. THOMAS EIDSVOLD |
| |
LOL FOODS, INC. By: /s/ Chuck Schmaderer Name: Chuck Schmaderer Title: Secretary | |
36
Schedules:
| Schedule 2.1(a) | Real Property |
| Schedule 2.1(b) | Assumed Contracts |
| Schedule 2.2 | Excluded Assets |
| Schedule 3.2 | Allocation of Purchase Price |
| Schedule 4.2(a) | Permitted Encumbrances |
| Schedule 6.3 | Seller's Required Consents |
| Schedule 6.6(a) | Liens and Encumbrances |
| Schedule 6.6(d) | Fixed Assets and Personal Property |
| Schedule 6.7 | Intellectual Property |
| Schedule 6.8 | Contracts |
| Schedule 6.12 | Employees |
| Schedule 6.13 Schedule 8.4 | Employee Benefit Plans Transition Services |
| | |
Exhibits:
| Exhibit A | Form of Bill of Sale |
| Exhibit B | Form of Assignment and Assumption Agreement (including the Trademark Assignment and Website Content and Domain Assignment attached thereto) |
| Exhibit C | Form of Noncompetition Agreement |
| Exhibit D | Form of Employment Agreement – Kellie Janssen |
| Exhibit E | Form Escrow Agreement |
37
Exhibit 31.1
CERTIFICATION
I, Christopher H. Atayan, certify that:
1. I have reviewed this report on Form 10-Q of AMCON Distributing Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrants’ fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: January 18, 2023 | /s/ Christopher H. Atayan |
| Christopher H. Atayan, |
| Chief Executive Officer and Chairman |
Exhibit 31.2
CERTIFICATION
I, Charles J. Schmaderer, certify that:
1. I have reviewed this report on Form 10-Q of AMCON Distributing Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrants’ fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: January 18, 2023 | /s/ Charles J. Schmaderer |
| Charles J. Schmaderer, Vice President, Chief Financial Officer and Secretary |
| |
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q (the “Report”) of AMCON Distributing Company (the “Company”) for the fiscal quarter ended December 31, 2022, I, Christopher H. Atayan, Chief Executive Officer and Principal Executive Officer of the Company, hereby certify that, to the best of my knowledge and belief:
1. | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: January 18, 2023 | /s/ Christopher H. Atayan |
| Christopher H. Atayan |
| Title: Chief Executive Officer and Chairman |
A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q (the “Report”) of AMCON Distributing Company (the “Company”) for the fiscal quarter ended December 31, 2022, I, Charles J. Schmaderer, Vice President, Chief Financial Officer and Secretary of the Company, hereby certify that, to the best of my knowledge and belief:
1. | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: January 18, 2023 | /s/ Charles J. Schmaderer |
| Charles J. Schmaderer |
| Title: Vice President, Chief Financial Officer and Secretary |
| |
A signed original of this written statement required by Section 906 has been provided to AMCON Distributing Company and will be retained by AMCON Distributing Company and furnished to the Securities and Exchange Commission or its staff upon request.