AMCON DISTRIBUTING CO

Previous wording

Our business continues to be impacted by macroeconomic factors, supply chain disruptions, and an extended period of high inflation. These factors have decreased consumer discretionary spending and related retail level demand and have also resulted in sustained cost pressures across our entire business in the form of higher product, equipment, labor, interest and other operating costs.

Current wording

Our business continues to be impacted by macroeconomic factors, supply chain disruptions, and an extended period of high inflation. These factors have decreased consumer discretionary spending and related retail level demand and have also resulted in sustained cost pressures across our entire business including equipment, labor, interest, product, and other operating costs.

Previous wording

We are closely monitoring proposals from governmental and other regulatory bodies, including the United States Food and Drug Administration (“FDA”), which is evaluating the possible prohibition and/or limitations on the sale of certain cigarette, e-cigarette, tobacco, and vaping products, including menthol cigarettes. If such regulations or product sale limitations were to be implemented, they may limit the range of products we are able to sell in related product categories and decrease overall consumer demand. Any such changes may negatively impact our revenues, gross margins, and financial results.

Current wording

We continue to closely monitor regulatory actions and proposals from federal and state governmental and regulatory bodies, including the United States Food and Drug Administration (“FDA”), which is evaluating the possible prohibition and/or limitations on the sale of certain cigarette, e-cigarette, tobacco, and vaping products, including menthol cigarettes. If such further regulations or further product sale limitations were to be implemented, they may limit the range of products we are able to sell in related product categories and decrease overall consumer demand. Any such changes may negatively impact our revenues, gross margins, and financial results.

Previous wording

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, 2023, as filed with the Securities and Exchange Commission. Other than the adoption of ASU 2016-13 as described in Note 1 of Part I, Item 1 of this quarterly report on Form 10-Q, there have been no significant changes with respect to these estimates and related policies during the three months ended December 2023.

Current wording

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, 2023, as filed with the Securities and Exchange Commission. Other than the adoption of ASU 2016-13 as described in Note 1 of Part I, Item 1 of this quarterly report on Form 10-Q, there have been no significant changes with respect to these estimates and related policies during the six months ended March 2024.

Previous wording

The following discussion and analysis includes the Company’s results of operations for the three months ended December 2023 and December 2022:

Current wording

The following discussion and analysis includes the Company’s results of operations for the three and six months ended March 2024 and March 2023:

Previous wording

Our Wholesale Segment is one of the largest wholesale distributors in the United States, serving approximately 7,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 20,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery products, 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 2023, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.

Current wording

Our Wholesale Segment is one of the largest wholesale distributors in the United States, serving approximately 7,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 20,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery products, 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 2023, Convenience Store News ranked us as the sixth (6 th) largest convenience store distributor in the United States based on annual sales.

Previous wording

Our Wholesale Segment operates nine distribution centers located in Illinois, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia. These distribution centers, combined with cross-dock facilities, include approximately 1.3 million 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.

Current wording

Our Wholesale Segment operates 12 distribution centers located in Colorado, Illinois, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia. These distribution centers, combined with cross-dock facilities, include approximately 1.7 million square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellanova, 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.

Previous wording

Our Retail Segment operates 15 retail health food stores as Chamberlin’s Natural Foods, Akin’s Natural Foods, and Earth Origins Market. These stores carry over 36,000 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.

Current wording

Our Retail Segment operates 14 retail health food stores as Chamberlin’s Natural Foods, Akin’s Natural Foods, and Earth Origins Market. These stores carry over 36,000 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.

Previous wording

Sales in our Wholesale Segment increased $78.5 million during Q1 2024 as compared to Q1 2023. Significant items impacting sales during Q1 2024 included a $78.7 million increase in sales related to the acquisition of Henry’s during Q2 2023, a $26.3 million increase in sales related to price increases implemented by cigarette manufacturers, and a $5.0 million increase in sales related to the volume and mix of products in our tobacco, confectionery, foodservice, and other categories (“Other Products”), partially offset by a $31.5 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.4 million during Q1 2024 as compared to Q1 2023. This increase was due to approximately $0.8 million related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian and approximately $0.8 million related to higher sales volumes in our existing stores, partially offset by a $1.2 million decrease related to the closure of four stores between the comparative periods.

Current wording

Sales in our Wholesale Segment increased $17.0 million during Q2 2024 as compared to Q2 2023. Significant items impacting sales during Q2 2024 included a $24.4 million increase in sales related to the acquisition of Henry’s Foods, Inc. (“Henry’s”) during Q2 2023 and a $26.2 million increase in sales related to price increases implemented by cigarette manufacturers, partially offset by a $33.0 million decrease in sales related to the volume and mix of cigarette cartons sold, and a $0.6 million decrease in sales related to the volume and mix of products in our tobacco, confectionery, foodservice, and other categories (“Other Products”). Sales in our Retail Segment decreased $0.1 million during Q2 2024 as compared to Q2 2023. This decrease was due to approximately $1.6 million related to the closure of five stores between the comparative periods, partially offset by a $0.8 million increase related to higher sales volumes in our existing stores and a $0.7 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian.

Previous wording

Gross profit in our Wholesale Segment increased $8.1 million during Q1 2024 as compared to Q1 2023. Significant items impacting gross profit during Q1 2024 included a $9.0 million increase in gross profit related to the acquisition of Henry’s in Q2 2023, a $0.1 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases, partially offset by a $0.2 million decrease in gross profit related to the volume and mix of cigarette cartons sold between the comparative periods and a $0.8 million decrease in gross profit related to the mix of volumes and promotions in our Other Products category. Gross profit in our Retail Segment increased $0.3 million during Q1 2024 as compared to Q1 2023. This change was primarily related to a $0.3 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian and a $0.4 million increase in realized margins in our existing stores, partially offset by a $0.4 million decrease related to the closure of four stores between the comparative periods.

Current wording

Gross profit in our Wholesale Segment increased $1.1 million during Q2 2024 as compared to Q2 2023. Significant items impacting gross profit during Q2 2024 included a $2.9 million increase in gross profit related to the acquisition of Henry’s in Q2 2023, partially offset by a $0.8 million decrease in gross profit due to the timing and related benefits of cigarette manufacturer price increases, a $0.5 million decrease in gross profit related to the volume and mix of cigarette cartons sold between the comparative periods and a $0.5 million decrease in gross profit related to the mix of volumes and promotions in our Other Products category. Gross profit in our Retail Segment increased approximately $0.1 million during Q2 2024 as compared to Q2 2023. This change was primarily related to a $0.4 million increase in realized margins in our existing stores and a $0.3 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian, partially offset by a $0.6 million decrease related to the closure of five stores between the comparative periods.

Previous wording

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 2024 operating expenses increased $10.0 million as compared to Q1 2023. Significant items impacting operating expenses during Q1 2024 included a $7.8 million increase in operating expenses related to the acquisition of Henry’s during Q2 2023, a $1.5 million increase related to employee compensation and benefit costs, a $0.4 million increase in customer expected credit loss expense, a $0.3 million increase in insurance costs and a $0.3 million increase in other Wholesale Segment operating expenses, partially offset by a $0.3 million decrease in fuel costs.

Current wording

Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q2 2024 operating expenses increased $3.2 million as compared to Q2 2023. Significant items impacting operating expenses during Q2 2024 included a $2.7 million increase in operating expenses related to the acquisition of Henry’s during Q2 2023 and a $0.9 million increase related to employee compensation and benefit costs, partially offset by a $0.2 million decrease in other Wholesale Segment operating costs, and a $0.2 million decrease in operating expense costs in our Retail Segment. The decrease in our Retail Segment was primarily due to a $0.7 million decrease related to the closure of five stores between the comparative periods, partially offset by an increase of $0.3 million in our existing stores and a $0.2 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian.

Previous wording

Interest expense increased $0.6 million in Q1 2024 as compared to Q1 2023, primarily related to higher interest rates and higher outstanding debt balances in the current period related to the acquisition of Henry’s in Q2 2023.

Current wording

Interest expense increased $0.1 million in Q2 2024 as compared to Q2 2023, primarily related to higher interest rates, increased capital expenditures, and higher outstanding debt balances in the current period related to the acquisition of Henry’s in Q2 2023.

Previous wording

The Company primarily finances its operations through three credit facility agreements (a) a facility that is an obligation of AMCON Distributing Company (the “AMCON Facility”), (b) a facility that is an obligation of Team Sledd (the “Team Sledd Facility”) and (c) a facility that is the obligation of Henry’s (the “Henry’s Facility”) (collectively, the “Facilities”) and long-term debt agreements with banks. The Team Sledd Facility and the Henry’s Facility are non-recourse to AMCON Distributing Company, are not guaranteed by AMCON Distributing Company and have no cross default provisions applicable to AMCON Distributing Company.

Current wording

The Company primarily finances its operations through three credit facility agreements (a) a facility that is an obligation of AMCON Distributing Company (the “AMCON Facility”), (b) a facility that is an obligation of Team Sledd, LLC (“Team Sledd” and, the “Team Sledd Facility”) and (c) a facility that is the obligation of Henry’s (the “Henry’s Facility”) (collectively, the “Facilities”) and long-term debt agreements with banks. The Team Sledd Facility and the Henry’s Facility are non-recourse to AMCON Distributing Company, are not guaranteed by AMCON Distributing Company and have no cross default provisions applicable to AMCON Distributing Company.

Previous wording

At December 2023, the Facilities had a total combined borrowing capacity of $300.0 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 Henry’s Facility matures in February 2026, the AMCON Facility matures in June 2027, and the Team Sledd Facility matures in March 2028, 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 certain real estate. The Facilities each feature an unused commitment fee and springing financial covenants. Borrowings under the Facilities bear interest at either the bank’s prime rate or the Secured Overnight Financing Rate (“SOFR”), plus any applicable spreads.

Current wording

At March 2024, the Facilities had a total combined borrowing capacity of $300.0 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 Henry’s Facility matures in February 2026, the AMCON Facility matures in June 2027, and the Team Sledd Facility matures in March 2028, 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 certain real estate. The Facilities each feature an unused commitment fee

Previous wording

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 2023 was $228.6 million, of which $140.1 million was outstanding, leaving $88.5 million available.

Current wording

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 March 2024 was $191.2 million, of which $99.2 million was outstanding, leaving $92.0 million available.

Previous wording

The average interest rate of the Facilities was 7.17% at December 2023. For the three months ended December 2023, the peak borrowings under the Facilities was $156.8 million, and the average borrowings and average availability under the Facilities was $125.2 million and $86.8 million, respectively.

Current wording

The average interest rate of the Facilities was 6.97% at March 2024. For the six months ended March 2024, the peak borrowings under the Facilities was $156.8 million, and the average borrowings and average availability under the Facilities was $120.1 million and $83.5 million, respectively.

Previous wording

Henry’s at December 2023. Additionally, the Team Sledd Facility and the Henry’s Facility are non-recourse to AMCON Distributing Company, are not guaranteed by AMCON Distributing Company and have no cross default provisions applicable to AMCON Distributing Company. The Company and its subsidiaries, including Team Sledd and Henry’s, were in compliance with all of the financial covenants under the Facilities at December 2023.

Current wording

Team Sledd’s three notes payable and the Team Sledd Facility contain cross default provisions. The Henry’s note payable and the Henry’s Facility contain cross default provisions. There were no such cross defaults for either Team Sledd or Henry’s at March 2024. Additionally, the Team Sledd Facility and the Henry’s Facility are non-recourse to AMCON Distributing Company, are not guaranteed by AMCON Distributing Company and have no cross default provisions applicable to AMCON Distributing Company. The Company and its subsidiaries, including Team Sledd and Henry’s, were in compliance with all of the financial covenants under the Facilities at March 2024.

Previous wording

The Company has issued a letter of credit for $1.1 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.

Current wording

The Company has issued a letter of credit for $1.5 million to its workers’ compensation insurance carriers as part of its self-insured loss control program.