# Amcon Distributing Co: Form 10-Q for the period ended Mar 31, 2022

- Company: [Amcon Distributing Co](/companies/dit.md) (CIK 928465)
- Form: 10-Q
- Filed: 2022-04-18
- Accepted by EDGAR: Apr 18, 2022, 16:10 ET
- Period: 2022-03-31
- Accession: 0001558370-22-005554
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/928465/000155837022005554/dit-20220331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/928465/000155837022005554/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $391.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2021-10-01 to 2022-03-31 | $814.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $365.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2021-10-01 to 2022-03-31 | $760.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $26.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2021-10-01 to 2022-03-31 | $53.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-01-01 to 2022-03-31 | $21.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2021-10-01 to 2022-03-31 | $44.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | $3.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2021-10-01 to 2022-03-31 | $7.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-01-01 to 2022-03-31 | $244.9k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2021-10-01 to 2022-03-31 | $567.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $1.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2021-10-01 to 2022-03-31 | $2.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | $3.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-10-01 to 2022-03-31 | $6.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | $5.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2021-10-01 to 2022-03-31 | $10.33 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $5.29 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2021-10-01 to 2022-03-31 | $10.62 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 578,751 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2021-10-01 to 2022-03-31 | 581,328 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2021-10-01 to 2022-03-31 | $13.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $653.8k | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 6 months, 2021-10-01 to 2022-03-31 | $974.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2021-10-01 to 2022-03-31 | $3.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2022-03-31 | $527.6k | us-gaap:Cash |
| Current assets | at 2022-03-31 | $130.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $181.2m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $45.4m | us-gaap:LiabilitiesCurrent |
| Current portion of debt | at 2022-03-31 | $572.1k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-03-31 | $82.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,467 characters.

### BUSINESS UPDATE AND IMPACT OF COVID-19

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

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

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

### FORWARD-LOOKING STATEMENTS

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

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

- risks associated with an inflationary operating environment, particularly as it relates to wages, fuel, and commodity prices which impact our operating cost structure and could impact food ingredient costs and demand for many of the products we sell,
- risks associated with the threat or occurrence of epidemics or pandemics (such as COVID-19 or its variants) or other public health issues, including the continued health of our employees and management, the reduced demand for our goods and services or increased credit risk from customer credit defaults resulting from an economic downturn,
- risks associated with the imposition of governmental orders restricting our operations and the operations of our suppliers and customers, in particular, disruptions to our supply chain or our ability to procure products or fulfill orders due to labor shortages in our warehouse operations,
- risks associated with the Company’s business model, which since the onset of the COVID-19 pandemic has experienced both higher sales volumes and labor costs, and the related risk of sales returning to more historical levels without the Company being able to offset increases in its cost structure,
- risks associated with the acquisition of assets or new businesses or investments in equity investees by either of our business segments including, but not limited to, risks associated with purchase price and business valuation risks, vendor and customer retention risks, employee and technology integration risks, and risks related to the assumption of certain liabilities or obligations,
- increasing competition and market conditions in our wholesale and retail health food businesses and any associated impact on the carrying value and any potential impairment of assets (including intangible assets) within those businesses,
- that our repositioning strategy for our retail business will not be successful,
- risks associated with opening new retail stores,
- if online shopping formats such as Amazon™ continue to grow in popularity and further disrupt traditional sales channels, it may present a significant direct risk to our brick and mortar retail business and potentially to our wholesale distribution business,
- the potential impact that ongoing, decreasing, or changing trade tariff and trade policies may have on our product costs or on consumer disposable income and demand,
- increasing product and operational costs resulting from ongoing supply chain disruptions, an intensely competitive labor market with a limited pool of qualified workers, and higher incremental costs associated with the handling and transportation of certain product categories such as foodservice,
- increases in state and federal excise taxes on cigarette and tobacco products and the potential impact on demand, particularly as it relates to current legislation under consideration which could significantly increase such taxes,
- regulations, potential bans and/or litigation related to the manufacturing, distribution, and sale of certain cigarette, tobacco, and e-cigarette/vaping products by the FDA, state or local governmental agencies, or other parties, including proposed forthcoming regulations around the manufacture and distribution of certain menthol and flavored tobacco products,
- risks associated with disruptions to our technology systems including security breaches, cyber-attacks, malware, or other methods by which our information systems could be compromised,
- increases in inventory carrying costs and customer credit risks,
- changes in pricing strategies and/or promotional/incentive programs offered by cigarette and tobacco manufacturers,
- demand for the Company’s products, particularly cigarette, tobacco and e-cigarette/vaping products,
- risks that product manufacturers may begin selling directly to convenience stores and bypass wholesale distributors,
- changes in laws and regulations and ongoing compliance related to health care and associated insurance,
- increasing health care costs for both the Company and consumers and its potential impact on discretionary consumer spending,
- decreased availability of capital resources,
- domestic regulatory and legislative risks,
- poor weather conditions, and the adverse effects of climate change,
- consolidation trends within the convenience store, wholesale distribution, and retail health food industries,
- natural disasters, and domestic or political unrest, or any restrictions, regulations, or security measures implemented by governmental bodies in response to these items,
- other risks over which the Company has little or no control, and any other factors not identified herein.

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

### CRITICAL ACCOUNTING ESTIMATES

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

### SECOND FISCAL QUARTER 2022 (Q2 2022)

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

### Wholesale Segment

Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,100 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 17,700 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In December 2021, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.

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

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

### Retail Segment

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

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

Our Retail Segment operates twenty retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akin’s”), and Earth Origins Market (“EOM”). These stores carry over 35,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was established in 1935, has a total of seven locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. EOM has a total of seven locations in Florida.

### RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH:

| ​ ​ CONSOLIDATED: | ​ ​ | ​ ​ ​ 2022 ​ ​ ​ | ​ ​ ​ 2021 ​ ​ ​ | ​ ​ Incr (Decr) ​ ​ | ​ ​ | ​ % Change ​ |
| --- | --- | ---: | ---: | ---: | --- | ---: |
| Sales(1) | ​ | $391,888,192 ​ | $378,513,490 ​ | $13,374,702 |  | 3.5 |
| Cost of sales | ​ | 365,211,270 ​ | 355,540,704 ​ | 9,670,566 |  | 2.7 |
| Gross profit | ​ | 26,676,922 ​ | 22,972,786 ​ | 3,704,136 |  | 16.1 |
| Gross profit percentage | ​ | 6.8% | 6.1% | ​ | ​ | ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Operating expense | ​ | $22,733,573 ​ | $19,802,092 ​ | $2,931,481 |  | 14.8 |
| Operating income | ​ | 3,943,349 ​ | 3,170,694 ​ | 772,655 |  | 24.4 |
| Interest expense | ​ | 244,920 ​ | 310,543 ​ | (65,623) |  | (21.1) |
| Income tax expense | ​ | 1,345,000 ​ | 829,000 ​ | 516,000 |  | 62.2 |
| Equity method investment earnings, net of tax | ​ | ​ 591,795 ​ | ​ 313,492 ​ | ​ 278,303 | ​ | 88.8 |
| Net income available to common shareholders | ​ | 3,006,182 ​ | 2,428,908 ​ | 577,274 |  | 23.8 |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| BUSINESS SEGMENTS: | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Wholesale | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Sales | ​ | $379,468,896 ​ | $366,207,158 ​ | $13,261,738 |  | 3.6 |
| Gross profit | ​ | 21,939,991 ​ | 18,279,542 ​ | 3,660,449 |  | 20.0 |
| Gross profit percentage | ​ | 5.8% | 5.0% | ​ | ​ | ​ |
| Retail | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Sales | ​ | $12,419,296 ​ | $12,306,332 ​ | $112,964 |  | 0.9 |
| Gross profit | ​ | 4,736,931 ​ | 4,693,244 ​ | 43,687 |  | 0.9 |
| Gross profit percentage | ​ | 38.1% | 38.1% | ​ | ​ | ​ |

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

### SALES

Changes in sales are driven by two primary components:

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

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

### SALES – Q2 2022 vs. Q2 2021

Sales in our Wholesale Segment increased $13.3 million during Q2 2022 as compared to Q2 2021. Significant items impacting sales during Q2 2022 included a $16.8 million increase in sales related to price increases implemented by cigarette manufacturers, a $12.3 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), partially offset by a $15.8 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.1 million during Q2 2022 as compared to Q2 2021. Of this increase, approximately $0.4 million related to higher sales volumes in our existing stores, partially offset by a $0.3 million decrease in sales volume related to the closure of a non-performing store in our Florida market in the comparative prior year period. Sales in both of our business segments continue to benefit from high consumer demand across a range of product categories.

### GROSS PROFIT – Q2 2022 vs. Q2 2021

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

Gross profit in our Wholesale Segment increased $3.7 million during Q2 2022 as compared to Q2 2021. Significant items impacting gross profit during Q2 2022 included a $3.3 million increase in gross profit related to higher sales volumes and promotions in our Other Products category and a $0.4 million increase in gross profit related to net impact of cigarette manufacturer promotions and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment was even during Q2 2022 as compared to Q2 2021. Significant items impacting gross profit during Q2 2022 included a $0.1 million increase in gross margin in our existing stores which have benefited from higher sales volume and improved product mix, partially offset by a $0.1 million decrease in gross margin related to the closure of a non-performing store in our Florida market in the comparative prior year period.

### OPERATING EXPENSE – Q2 2022 vs. Q2 2021

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

### INCOME TAX EXPENSE – Q2 2022 vs. Q2 2021

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

### RESULTS OF OPERATIONS – SIX MONTHS ENDED MARCH:

| ​ ​ CONSOLIDATED: | ​ ​ | ​ ​ ​ 2022 ​ ​ ​ | ​ ​ ​ 2021 ​ ​ ​ | ​ ​ Incr (Decr) ​ ​ | ​ ​ | ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | ---: |
| Sales(1) | ​ | $814,459,469 ​ | $783,258,263 ​ | $31,201,206 |  | 4.0 |
| Cost of sales | ​ | ​ 760,849,885 ​ | ​ 736,823,498 ​ | ​ 24,026,387 |  | 3.3 |
| Gross profit | ​ | ​ 53,609,584 ​ | ​ 46,434,765 ​ | ​ 7,174,819 |  | 15.5 |
| Gross profit percentage | ​ | ​ 6.6% | ​ 5.9% | ​ ​ | ​ | ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Operating expense | ​ | $45,908,557 ​ | $39,176,193 ​ | $6,732,364 |  | 17.2 |
| Operating income | ​ | ​ 7,701,027 ​ | ​ 7,258,572 ​ | ​ 442,455 |  | 6.1 |
| Interest expense | ​ | ​ 567,018 ​ | ​ 686,973 ​ | ​ (119,955) |  | (17.5) |
| Income tax expense | ​ | ​ 2,590,000 ​ | ​ 1,840,000 ​ | ​ 750,000 |  | 40.8 |
| Equity method investment earnings, net of tax | ​ | ​ 1,362,161 ​ | ​ 648,831 ​ | ​ 713,330 |  | 109.9 |
| Net income available to common shareholders | ​ | ​ 6,007,238 ​ | ​ 5,506,518 ​ | ​ 500,720 |  | 9.1 |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| BUSINESS SEGMENTS: | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Wholesale | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Sales | ​ | $790,114,968 ​ | $759,804,833 ​ | $30,310,135 |  | 4.0 |
| Gross profit | ​ | ​ 44,318,794 ​ | ​ 37,646,883 ​ | ​ 6,671,911 |  | 17.7 |
| Gross profit percentage | ​ | ​ 5.6% | ​ 5.0% | ​ ​ | ​ | ​ |
| Retail | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ | ​ |
| Sales | ​ | $24,344,501 ​ | $23,453,430 ​ | $891,071 |  | 3.8 |
| Gross profit | ​ | 9,290,790 ​ | 8,787,882 ​ | 502,908 |  | 5.7 |
| Gross profit percentage | ​ | 38.2% | 37.5% | ​ ​ | ​ | ​ |

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

### SALES – Six months ended March 2022

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

### GROSS PROFIT – Six months ended March 2022

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

### OPERATING EXPENSE – Six months ended March 2022

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

### INCOME TAX EXPENSE – Six months ended March 2022

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

### LIQUIDITY AND CAPITAL RESOURCES

### Overview

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

In general, the Company finances its operations through a credit facility agreement (the “Facility”) with Bank of America acting as the senior agent and with BMO Harris Bank (“BMO”) participating in the loan syndication. The Facility included the following significant terms at March 2022:

- A March 2025 maturity date without a penalty for prepayment.
- $110.0 million revolving credit limit.
- Loan accordion allowing the Company to increase the size of the Facility by $25.0 million.
- A provision providing an additional $10.0 million of credit advances for certain inventory purchases.
- Evergreen renewal clause automatically renewing the Facility for one year unless either the borrower or lender provides written notice terminating the Facility at least 90 days prior to the end of any original or renewal term of the Facility.
- The Facility bears interest at either the bank’s prime rate, or at LIBOR (or equivalent rate index) plus 125 - 150 basis points depending on certain Facility utilization measures, at the election of the Company. For this purpose, in no event shall LIBOR be less than zero basis points.
- Lending limits subject to accounts receivable and inventory limitations.
- An unused commitment fee equal to one-quarter of one percent (1/4%) per annum on the difference between the maximum loan limit and average monthly borrowings.
- Secured by collateral including all of the Company’s equipment, intangibles, inventories, and accounts receivable.
- A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the Facility. The Company’s fixed charge ratio was over 1.0 for the trailing twelve months.
- Provides that the Company may use up to $5.0 million annually, on a collective basis, for the payment of dividends on its common stock, or other distributions or investments, provided the Company is not in default before or after such dividends, distributions or investments. Additionally, the Company may pay dividends on its common stock, or make other distributions or investments in excess of $5.0 million annually provided the Company meets certain excess availability and proforma fixed charge coverage ratios and is not in default before or after such dividends, distributions or investments.

The amount available for use from the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at March 2022 was $106.0 million, of which $35.2 million was outstanding, leaving $70.8 million available.

At March 2022, the revolving portion of the Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was 1.76% at March 2022. For the six months ended March 2022, our peak borrowings under the Facility were $64.3 million, and our average borrowings and average availability under the Facility were $39.1 million and $56.5 million, respectively.

### Cross Default and Co-Terminus Provisions

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

### Dividend Payments

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

### Other

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

### Off-Balance Sheet Arrangements

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

### Liquidity Risk

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

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

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.

## Controls and procedures

As filed, 4,283 characters.

### Evaluation of Disclosure Controls and Procedures

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

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

### Limitations on Effectiveness of Controls

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

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

### Other

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

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 205 characters.

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

Filed Apr 18, 2022.
Source: SEC EDGAR, the filing index for accession 0001558370-22-005554. Last ingested by Listed: Nov 10, 2026, 02:46 ET. No prices; not investment advice.