ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements under Item 8 and other information in this report, including Critical Accounting Estimates and Cautionary Information included at the end of this Item 7. The following discussion and analysis includes the results of operations for the twelve month periods ended September 2022 and September 2021. For more information regarding our business segments, see Item 1 “Business” of this Annual Report.
Business Update
While the Company experienced strong fiscal 2022 results, it remains cautious moving into fiscal 2023 and beyond based on a range of considerations including, but not limited to, those described below.
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 both of our business segments as product, labor, fuel, interest and other costs have all increased significantly.
Since the onset of the COVID-19 pandemic, both of our businesses have experienced an increase in demand and sales across a broad range of product categories. It remains unclear, however, if these demand trends will remain intact or if they will eventually revert back to more historical levels over time, particularly as rapid inflation continues to impact consumer discretionary spending.
Finally, 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 e-cigarette/vaping products. If such regulations were to be implemented, they would have a negative impact on the Company’s financial results.
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Results of Operations
The following table sets forth an analysis of various components of the Company’s Statement of Operations as a percentage of sales for fiscal years 2022 and 2021:
Fiscal Years
Gross profit 6.4 6.0
Selling, general and administrative expenses 5.1 4.7
Depreciation and amortization 0.2 0.2
Operating income 1.1 1.1
Interest expense 0.1 0.1
Other (income), net (0.1) —
Income from operations before income taxes 1.0 1.0
Income tax expense 0.3 0.3
Equity method investment earnings, net of tax 0.1 0.2
Net income available to common shareholders 0.8 % 0.9 %
The following table presents selected statement of operations data for fiscal years 2022 and 2021:
Fiscal Years
CONSOLIDATED:
Gross profit percentage 6.4 % 6.0 %
Interest expense 2.2 1.3 0.9
Income tax expense 6.5 4.5 2.0
Equity method investment earnings, net of tax 1.7 3.4 (1.7)
Net income available to common shareholders 16.7 15.5 1.2
BUSINESS SEGMENTS:
Wholesale
Gross profit percentage 5.6 % 5.1 %
Retail
Gross profit percentage 36.6 % 37.8 %
(2) Calculated based on rounded numbers as presented in the table.
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SALES
Changes in sales are driven by two primary components:
SALES—Fiscal 2022 vs. Fiscal 2021
Sales in our Wholesale Segment increased $339.5 million during fiscal 2022 as compared to fiscal 2021. Significant items impacting sales during fiscal 2022 included a $298.4 million increase in sales related to the acquisition of Team Sledd, LLC (“Team Sledd”), a $79.1 million increase in sales related to price increases implemented by cigarette manufacturers, and a $49.9 million increase in sales related to higher sales volumes in our tobacco, confectionary, foodservice, and other categories (“Other Products”), partially offset by a $87.9 million decrease in sales related to the volume and mix of cigarette cartons sold.
Sales in our Retail Segment decreased $1.1 million in fiscal 2022 as compared to fiscal 2021. Significant items impacting sales during fiscal 2022 included a $1.5 million decrease in sales volume related to store closures across the comparative periods, partially offset by a $0.4 million increase in sales related to higher sales volumes in our existing stores.
GROSS PROFIT—Fiscal 2022 vs. Fiscal 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 $28.2 million during fiscal 2022 as compared to fiscal 2021. Significant items impacting gross profit during fiscal 2022 included a $15.6 million increase in gross profit related to the acquisition of Team Sledd, a $11.7 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.8 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods, and a $0.1 million increase in gross profit related to the net impact of cigarette manufacturer promotions and gross margin enhancement, and the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment decreased $1.0 million in fiscal 2022 as compared to fiscal 2021. This change was primarily related to $0.5 million in inventory losses related to Hurricane Ian, and a $0.5 million decrease related to store closures across the comparative periods.
OPERATING EXPENSE—Fiscal 2022 vs. Fiscal 2021
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 fiscal 2022 consolidated operating expenses increased $22.4 million as compared to fiscal 2021. Significant items impacting operating expenses during fiscal 2022 included a $11.6 million increase in operating expenses related to the acquisition of Team Sledd, and a $7.3 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
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Company experienced a $2.0 million increase in fuel costs primarily related to higher diesel fuel prices, and a $1.5 million increase in operating expenses, including health and other insurance costs and other operating expenses in our Wholesale and Retail Segments. Significant items impacting operating expenses in our Retail Segment during fiscal 2022 included a $0.3 million increase in other operating expenses and $0.2 million in operating costs related to Hurricane Ian, partially offset by a $0.3 million decrease in operating expenses related to store closures across the comparative periods.
INCOME TAX EXPENSE — Fiscal 2022 vs. Fiscal 2021
The Company’s effective income tax rate increased during fiscal 2022 as compared to fiscal 2021, primarily due to higher non-deductible compensation during fiscal 2022, resulting in effective tax rates in excess of statutory rates.
Liquidity and Capital Resources
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. In Q3 2022, the Company amended the AMCON Facility, increasing its aggregate borrowing capacity from $110.0 million to $150.0 million, extending the maturity date from March 2025 to June 2027, and adding certain real estate properties as eligible borrowing collateral under the credit agreement.
At September 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. 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 September 2022 was $184.8 million, of which $91.3 million was outstanding, leaving $93.5 million available.
The average interest rate of the Facilities was 5.11% at September 2022. During fiscal 2022, the peak borrowings under the Facilities was $123.5 million, and the average borrowings and average availability under the Facilities was $60.7 million and $69.4 million, respectively.
Cross Default and Co-Terminus Provisions
The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which was financed through a single term loan (the “Real Estate Loan”) with BMO Harris Bank N.A. (“BMO”) which is also a participant lender on the AMCON Facility. During Q4 2022, in connection with the amendment to the AMCON Facility during Q3 2022, the Company’s Real Estate Loan with BMO was terminated and the $4.2 million remaining principal was paid in full. The Company’s real properties that were subject to the terminated agreement are now collateral under the AMCON Facility. The Real Estate Loan contained cross default provisions which would have caused it to be considered in default if the loans where BMO is a lender, including the AMCON Facility, were in default. There were no such cross defaults at September 2021. In addition, the Real Estate Loan contained co-terminus provisions which would have required all loans
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with BMO to be paid in full if any of the loans were paid in full prior to the end of their specified terms. Team Sledd’s three notes payable and the Team Sledd Facility contain cross default provisions. There were no such cross defaults at September 2022. The Company was in compliance with all of its financial covenants under the Facilities at September 2022.
Dividend Payments
The Company paid cash dividends of $3.4 million, or $5.72 per common share during each of fiscal 2022 and fiscal 2021.
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.
OTHER MATTERS—Critical Accounting Estimates
GENERAL
The Consolidated Financial Statements of the Company are prepared in accordance with U.S. generally accepted accounting principles, which require the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates are set forth below.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
NATURE OF ESTIMATES REQUIRED. The allowance for doubtful accounts represents our estimate of uncollectible accounts receivable at the balance sheet date. We monitor our credit exposure on a daily basis and regularly assess the adequacy of our allowance for doubtful accounts. Because credit losses can vary significantly over time, estimating the required allowance requires a number of assumptions that are uncertain.
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ASSUMPTIONS AND APPROACH USED. We estimate our required allowance for doubtful accounts using the following key assumptions:
INVENTORIES
NATURE OF ESTIMATES REQUIRED. In our businesses, we carry large quantities and dollar amounts of inventory. Inventories primarily consist of finished products purchased in bulk quantities to be sold to our customers. Given the large quantities and broad range of products we carry, there is a risk that inventory may become impaired because it has become unsaleable or unrefundable, slow moving, obsolete, or because it has been discontinued. The use of estimates is required in determining either the net realizable value (for our wholesale business) or the lower of cost or market (“LCM”) under the retail method (for our retail business) of this inventory.
ASSUMPTIONS AND APPROACH USED. We estimate our inventory obsolescence reserve at each balance sheet date based on the following criteria:
DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF LONG-LIVED ASSETS, INCLUDING GOODWILL AND LEASED RIGHT-OF-USE ASSETS
Long-lived assets consist primarily of property and equipment, leased right-of-use (“ROU”) assets, intangible assets, and goodwill acquired in business combinations. Property and equipment, ROU assets and amortizable identified intangible assets are assigned useful lives ranging from 1 to 40 years. Indefinite-lived intangible assets and goodwill are not amortized. Impairment of the Company’s long-lived assets is assessed during the Company’s fourth fiscal quarter using both qualitative and quantitative analysis, or whenever events or circumstances change that indicate the carrying value of such long-lived assets may not be recoverable.
NATURE OF ESTIMATES REQUIRED. Management has to estimate the useful lives of the Company’s long-lived assets. In regard to the Company’s impairment analysis, the most significant assumptions include management’s estimate of the annual growth rate used to project future sales and expenses.
ASSUMPTIONS AND APPROACH USED. For property and equipment, depreciable lives are based on our accounting policy which is intended to mirror the expected useful life of the asset. In determining the estimated useful life of ROU assets and amortizable intangible assets such as customer lists, we rely on our historical experience in addition to estimates of how long certain assets will generate cash flows. If impairment indicators arise, we then evaluate the potential
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impairment of property and equipment, ROU assets and amortizable identifiable intangible assets using an undiscounted future cash flow approach.
When evaluating the potential impairment of non-amortizable indefinite-lived assets and goodwill, the Company first assesses a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, market prices, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company’s reporting units. If after completing this assessment, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative evaluation is performed using the income approach (discounted cash flow method).
A discounted cash flow methodology requires the estimation of a wide range of factors including but not limited to: (i) forecasting future earnings and cash flows (ii) determining the discount rate applicable to the earnings stream being discounted, and (iii) computing a terminal value at some point in the future. These estimations require significant judgment and include making assumptions such as sales growth rates including the addition of new retail stores, future store profitability, planned capital expenditures, our ability to control costs, the successful implementation of initiatives designed to enhance sales and improve inventory management, gross profit estimates, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. The use of different assumptions or estimates for future cash flows could produce different results.
Goodwill recorded on the Company’s consolidated balance sheet represents amounts allocated to its wholesale reporting unit which totaled $5.3 million and $4.4 million at September 2022 and September 2021, respectively. The Company determined that the estimated fair value of its wholesale reporting unit exceeded its carrying value at both September 2022 and September 2021.
INSURANCE
The Company’s insurance for workers’ compensation, general liability and employee-related health care benefits are provided through high-deductible or self-insured programs. As a result, the Company accrues for its workers’ compensation liability based upon claim reserves established with the assistance of a third-party administrator, which are then trended and developed. The reserves are evaluated at the end of each reporting period. Due to the uncertainty involved with the realization of claims incurred but unreported, management is required to make estimates of these claims.
ASSUMPTIONS AND APPROACH USED. In order to estimate our reserve for incurred but unreported claims we consider the following key factors:
Employee Health Insurance Claims
Workers’ Compensation Insurance Claims
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INCOME TAXES
The Company accounts for its income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on provisions of tax law as currently enacted; the effects of future changes in tax laws are not anticipated. Future tax law changes, such as a change in the corporate tax rate, could have a material impact on our financial condition or results of operations.
On a periodic basis, we assess the likelihood that our deferred tax assets will be recovered from future taxable income and establish a related valuation allowance as appropriate. In performing our evaluation, we consider all available evidence, both positive and negative, to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance, the reversal of deferred tax liabilities and tax planning strategies. When appropriate, we record a valuation allowance against deferred tax assets to offset future tax benefits that may not be realized.
ASSUMPTIONS AND APPROACH USED. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events.
In making that estimate we consider the following key factors:
● our current financial position;
● historical financial information;
● future reversals of existing taxable temporary differences;
● taxable income in prior carryback years; and
● tax planning strategies.
REVENUE RECOGNITION
We recognize revenue in both our Wholesale Segment and our Retail Segment when the performance obligation is satisfied, which is the point at which control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods and services. For the majority of our customer arrangements, control transfers to customers at a point-in-time when goods have been delivered, as that is generally when legal title, physical possession and risks and rewards of goods and services transfers to the customer. Sales are shown net of returns, discounts, and sales incentives to customers.
NATURE OF ESTIMATES REQUIRED. We estimate and reserve for anticipated sales discounts. We also estimate and provide a reserve for anticipated sales incentives to customers when earned under established program requirements.
ASSUMPTIONS AND APPROACH USED. We estimate the sales reserves using the following criteria:
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Our estimates and assumptions for each of the aforementioned critical accounting estimates have not changed materially during the periods presented, nor are we aware of any reasons that they would be reasonably likely to change in the future.
BUSINESS COMBINATIONS
Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. Determining fair value of identifiable assets acquired, particularly intangibles, and liabilities assumed also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
NATURE OF ESTIMATES REQUIRED. We allocate the purchase price of acquired companies to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
ASSUMPTIONS AND APPROACH USED. Critical estimates in valuing certain intangible assets include but are not limited to the projected growth factors, future expected cash flows, discount rates, potential competitive and regulatory environment developments, and changes in the market for the Company's products and services. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Additionally, estimates associated with the accounting for acquisitions may change as new information becomes available regarding the assets acquired and liabilities assumed.
MANDATORILY REDEEMABLE NON-CONTROLLING INTEREST
Mandatorily redeemable non-controlling interest represents the non-controlling interest in the Company’s strategic investment in Team Sledd, LLC.
NATURE OF ESTIMATES REQUIRED. We record the mandatorily redeemable non-controlling interest at fair value. This valuation requires management to make significant estimates and assumptions, especially with respect to the timing of future redemptions and discount rates.
ASSUMPTIONS AND APPROACH USED. Critical estimates in valuing the mandatorily redeemable non-controlling interest include but are not limited to the projected growth factors, future expected cash flows, discount rates, potential competitive and regulatory environment developments, and changes in the market for the Company's products and services. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
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.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including 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
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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 opening new retail stores,
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● increases in inventory carrying costs and customer credit risks,
● decreased availability of capital resources,
● domestic regulatory and legislative risks,
● poor weather conditions, and the adverse effects of climate change,
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to 2022 and 2021 Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID# 49) 31
Consolidated Balance Sheets as of September 2022 and September 2021 33
Notes to Consolidated Financial Statements 37
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of AMCON Distributing Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AMCON Distributing Company and Subsidiaries (the Company) as of September 30, 2022 and 2021, the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisition of Team Sledd, LLC
As described in Note 2 to the financial statements, in May 2022 (the “Control Date”), the Company became the majority owner of Team Sledd, LLC (“Team Sledd”) with a controlling interest of approximately 56% through Team Sledd’s redemption of membership interests from certain members. The Company provided no additional consideration to acquire control of Team Sledd. The transaction was accounted for in accordance with Accounting Standards Codification (“ASC”) 805 – Business Combinations and the Company measured the acquisition-date fair value of Team Sledd using the discounted cash flow methodology. Inputs used to measure the acquisition-date fair value included sales growth, gross profit estimates, economic and industry conditions, working capital requirements and the contractual requirements of the operating agreement.
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We identified the determination of the fair value of Team Sledd and the fair value of the related mandatorily redeemable non-controlling interest as a critical audit matter because of the significant assumptions used by the Company in determining fair value, including sales growth, gross profit estimates, operating income, the discount rate and the amounts and timing of redemption payments. Auditing management’s assumptions of sales growth, gross profit estimates, the discount rate and the timing of redemption payments involves a high degree of auditor judgment.
Our audit procedures related to the determination of the fair value of Team Sledd and the fair value of the related mandatorily redeemable non-controlling interest included the following, among others:
/s/ RSM US LLP
We have served as the Company’s auditor since 2006.
Omaha, Nebraska
November 23, 2022
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AMCON Distributing Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September September
ASSETS
Current assets:
Income taxes receivable 819,595 —
Note receivable, net of current portion — 3,325,000
Equity method investment — 9,380,343
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Income taxes payable — 867,160
Current mandatorily redeemable non-controlling interest 1,712,095 —
Shareholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized — —
The accompanying notes are an integral part of these consolidated financial statements.
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AMCON Distributing Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September
Other expense (income):
Basic earnings per share available to common shareholders $ 29.37 $ 28.24
Diluted earnings per share available to common shareholders $ 28.59 $ 27.36
Basic weighted average shares outstanding 567,697 550,551
Diluted weighted average shares outstanding 583,062 568,103
Dividends paid per common share $ 5.72 $ 5.72
The accompanying notes are an integral part of these consolidated financial statements.
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AMCON Distributing Company and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Additional
Common Stock Treasury Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
Repurchase of common stock — — (68) (5,738) — — (5,738)
The accompanying notes are an integral part of these consolidated financial statements.
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AMCON Distributing Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
September September
CASH FLOWS FROM OPERATING ACTIVITIES:
Amortization 70,887 —
Equity method investment earnings, net of tax (1,670,133) (3,357,978)
Gain on sales of property and equipment (140,139) (9,864)
Provision for losses on doubtful accounts (32,420) 50,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment 152,000 55,728
Principal payment received on note receivable 175,000 —
Cash acquired in business acquisition 7,958 —
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on long-term debt — 3,000,000
Principal payments on long-term debt (4,909,548) (510,177)
Proceeds from exercise of stock options 173,590 —
Repurchase of common stock — (5,738)
Settlement and withholdings of equity-based awards (1,280,749) (415,057)
Distributions to non-controlling interest (737,570) —
Supplemental disclosure of cash flow information:
Supplemental disclosure of non-cash information:
Equipment acquisitions classified in accounts payable $ 91,656 $ 128,249
Effect of business acquisition (see Note 2) 23,308,624 —
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Company Operations:
AMCON Distributing Company and Subsidiaries (“AMCON” or “the Company”) serves customers in 29 states and is primarily engaged in the wholesale distribution of consumer products in the Central, Rocky Mountain, Mid-South and Mid-Atlantic regions of the United States.
AMCON’s wholesale distribution business includes seven distribution centers that sell approximately 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. The Company distributes products primarily to retailers such as convenience stores, discount and general merchandise stores, grocery stores, drug stores, and gas stations. In addition, the Company services institutional customers, including restaurants and bars, schools, sports complexes, as well as other wholesalers.
AMCON, through its Healthy Edge Inc. subsidiary, 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 natural supplements, organic and natural groceries, health and beauty care products, and other food items.
The Company’s operations are subject to a number of factors which are beyond the control of management, such as changes in manufacturers’ cigarette pricing, state excise tax increases, or the opening of competing retail stores in close proximity to the Company’s retail stores. While the Company sells a diversified product line, it remains dependent upon the sale of cigarettes which accounted for approximately 66% and 68% of the Company’s consolidated revenue during fiscal 2022 and fiscal 2021, respectively, and 18% and 16% of the Company’s consolidated gross profit during fiscal 2022 and fiscal 2021, respectively.
(b) Accounting Period:
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, and the fiscal years ended September 30, 2022 and September 30, 2021 have been included herein.
(c) Principles of Consolidation and Basis of Presentation:
The Consolidated Financial Statements include the accounts of AMCON, its wholly-owned subsidiaries and, since May 2022, its non-wholly-owned equity investment in Team Sledd, LLC (“Team Sledd”). All significant intercompany accounts and transactions have been eliminated.
(d) Cash and Accounts Payable:
AMCON utilizes a cash management system under which an overdraft is the normal book balance in the primary disbursing accounts. Overdrafts included in accounts payable at September 2022 and September 2021 totaled approximately $1.6 million and $1.0 million, respectively, and reflect checks drawn on the disbursing accounts that have been issued but have not yet cleared through the banking system. The Company’s policy has been to fund these outstanding checks as they clear with borrowings under its revolving credit facilities (see Note 7). These outstanding checks (book overdrafts) are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows.
(e) Accounts Receivable:
Accounts receivable consist primarily of amounts due to the Company from its normal business activities, including trade receivables from customers and other receivables primarily related to various rebate and promotional incentives with the Company’s suppliers. An allowance for doubtful accounts is maintained to reflect the expected uncollectibility of accounts
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receivable based on past collection history, evaluation of economic conditions as they may impact our customers, and specific risks identified in the portfolio. The Company determines the past due status of trade receivables based on our terms with each customer. Account balances are charged off against the allowance for doubtful accounts when collection efforts have been exhausted and the account receivable is deemed worthless. Any subsequent recoveries of charged off account balances are recorded as income in the period received. As of September 2022 and September 2021, receivables from transactions with customers, less allowance for doubtful accounts were $60.3 million and $34.3 million, respectively.
(f) Inventories:
At September 2022 and September 2021, 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 $1.1 million and $0.8 million at September 2022 and September 2021, respectively. These reserves include the Company’s obsolescence allowance, which reflects estimated unsaleable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.
(g) Prepaid Expenses and Other Current Assets:
A summary of prepaid expenses and other current assets is as follows (in millions):
Prepaid expenses $ 3.1 $ 1.6
Prepaid inventory 9.6 3.2
Note receivable, current portion — 0.2
Prepaid inventory represents inventory in-transit that has been paid for but not received.
The note receivable between AMCON and Team Sledd is eliminated in consolidation.
(h) Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation or amortization. Major renewals and improvements are capitalized and charged to expense over their useful lives through depreciation or amortization charges. Repairs and maintenance are charged to expense in the period incurred. The straight-line method of depreciation is used to depreciate assets over the estimated useful lives as follows:
Years
Land improvements 10 - 15
Warehouse equipment 3 - 20
Buildings and improvements 5 - 40
Furniture, fixtures and leasehold improvements 1 - 12
Vehicles 2 - 5
Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and the resulting gains or losses are reported as a component of operating income.
The Company reviews property and equipment for indicators of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Cash flows expected to be generated by the asset group are estimated over the asset’s useful life of the primary asset and based on updated projections on an undiscounted basis. If the evaluation indicates that the carrying value of the asset group may not be recoverable, the potential impairment is determined based on the amount by which the carrying value of the asset group exceeds the fair value of the asset group.
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During fiscal 2022, the Company recorded an impairment of fixed assets in an amount less than $0.1 million as a result of Hurricane Ian. There was no impairment of any property and equipment during fiscal 2021.
(i) Leases:
Lease liabilities are equal to the present value of the remaining fixed lease payments. Right-of-use (“ROU”) assets are determined based on the amount of the lease liability, plus initial direct costs incurred less lease incentives. The Company determines its incremental borrowing rates based on information available at the lease commencement date in calculating the present value of its lease payments. The Company does not recognize assets or liabilities for leases with an initial term of twelve months or less and these short-term lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected the practical expedient to account for non-lease components as part of the lease for all asset classes. The Company reviews its ROU lease assets for indicators of impairment in the same manner as its other property and equipment as described above in (h) Property and Equipment.
(j) Goodwill and Intangible Assets:
Goodwill consists of the excess purchase price paid in certain business combinations over the fair value of assets acquired and in the case of Team Sledd, represents synergies and economies of scale generated through reductions in selling, general, and administrative expenses. Intangible assets consist of trademarks, tradenames, and customer relationships acquired as part of acquisitions in addition to certain non-competition agreements. Goodwill, trademarks, and tradenames are considered to have indefinite lives.
Goodwill and intangible assets having indefinite useful lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. The Company performs its annual goodwill and intangible asset impairment assessment during the fourth fiscal quarter of each year.
When evaluating the potential impairment of non-amortizable indefinite lived assets and goodwill, the Company first assesses a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, market prices, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company’s reporting units. If after completing this assessment, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative evaluation is performed using the income approach (discounted cash flow method).
A discounted cash flow methodology requires the estimation of a wide range of factors including but not limited to: (i) forecasting future earnings and cash flows, (ii) determining the discount rate applicable to the earnings stream being discounted, and (iii) computing a terminal value at some point in the future. These estimations require significant judgment and include making assumptions such as sales growth rates including the addition of new retail stores, future store profitability, planned capital expenditures, our ability to control costs, the successful implementation of initiatives designed to enhance sales and improve inventory management, gross profit estimates, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. The use of different assumptions or estimates for future cash flows could produce different results.
For goodwill impairment testing, the Company utilizes the guidance in Accounting Standards Codification (“ASC”) 350 - Intangibles - Goodwill and Other whereby a reporting unit’s carrying value is compared to its fair value and impairment charges are recognized for an amount by which a reporting unit’s carrying amount exceeds its fair value.
The Company’s identifiable intangible assets with finite lives are amortized over their estimated useful lives and are assessed for impairment whenever events or circumstances change which may indicate that the carrying amount of the assets may not be recoverable. Identifiable intangible assets which are subject to amortization are evaluated for impairment
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using a process similar to that used in evaluating the elements of property and equipment. If impaired, the related assets are written down to their estimated fair value.
(k) Equity Method Investment:
The Company uses the equity method to account for its investment in an investee if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss (net of income taxes) of the investee is included in consolidated net earnings.
Judgment regarding the level of influence over its equity method investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company evaluates its equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing its equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and future prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified. See Note 2 (Acquisition) and Note 9 (Supplemental Pro Forma Information) for further information relating to the Company’s equity method investment.
(l) Revenue Recognition:
The Company recognizes revenues when the performance obligation is satisfied, which is the point where control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services. For the majority of the Company’s customer arrangements, control transfers to customers at a point-in-time when goods have been delivered, as that is generally when legal title, physical possession and risks and rewards of goods/services transfers to the customer. The timing of satisfaction of the performance obligation is not subject to significant judgment due to the simultaneous nature of the Company’s customer arrangements (same day creation and fulfillment). After the completion of its performance obligations, the Company has an unconditional right of payment from customers with varying collection and payment terms based on region, credit risk, and other situational factors. Customer receivables are included on the consolidated balance sheets less an allowance for doubtful accounts. The Company has elected the practical expedient permitting it to disregard financing components which may be deemed to be part of its transaction price as its customary payments terms are less than one year. See Note 13 “Business Segments” for the disaggregation of net sales for each of our business segments.
(m) Insurance:
The Company’s workers’ compensation, general liability, and employee-related health care benefits are provided through high-deductible or self-insurance programs. As a result, the Company accrues for its workers’ compensation and general liability based upon a claim reserve analysis. The Company has issued a letter of credit in the amount of $0.6 million to its workers’ compensation insurance carrier as part of its loss control program. The reserve for incurred, but not reported, employee health care benefits is calculated using the Company’s historical claims experience rate, plus specific reserves for large claims. The reserves associated with the exposure to these liabilities are reviewed by management for adequacy at the end of each reporting period.
(n) Income Taxes:
The Company uses the asset and liability method to calculate deferred income taxes. Deferred tax assets and liabilities are recognized on temporary differences between financial statement and tax bases of assets and liabilities using enacted tax rates. The effect of tax rate changes on deferred tax assets and liabilities is recognized in income during the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when we do not consider it more likely than not that some portion or all of the deferred tax assets will be realized.
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(o) Share-Based Compensation:
The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted. The fair value of stock options are estimated at the date of grant using the Black-Scholes option pricing model. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility. The fair value of restricted stock units is based on the period ending closing price of the Company’s common stock. Measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award and is reflected in our Consolidated Statement of Operations under “selling, general and administrative expenses.”
(p) Customer Sales Incentives:
The Company provides consideration to customers, such as sales allowances or discounts on a regular basis. In accordance with ASC 606, the Company estimates customer sales incentives due as sales are made and records them as a reduction of net sales.
(q) Excise Taxes:
Under ASC 606, the Company is primarily responsible for excise taxes levied on cigarette and other tobacco products and presents excise taxes as a component of revenue.
(r) Contract Costs:
Under ASC 606, the Company expenses as incurred any incremental costs to obtain and fulfill customer contracts as the related amortization period would be one year or less.
(s) Per-share Results:
Basic earnings or loss per share data are based on the weighted-average number of common shares outstanding during each period. Diluted earnings or loss per share data are based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options and restricted stock units.
(t) Use of Estimates:
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(u) Fair Value Measurements:
The Company’s financial assets and liabilities are recognized or disclosed at fair value in the financial statements on a recurring basis. The carrying amount of trade accounts receivable, other receivables, trade accounts payable, accounts payable and other accrued liabilities approximates fair value because of the short maturity of these financial instruments. The carrying amount of the Company’s variable and fixed rate debt also approximates fair value.
(v) Mandatorily Redeemable Non-Controlling Interest:
Mandatorily redeemable non-controlling interest (“MRNCI”) recorded on the Company’s balance sheet represents the non-controlling interest in the Company’s strategic investment in Team Sledd LLC (“Team Sledd”). In conjunction with the finalization of the Company’s preliminary accounting for the Team Sledd acquisition described in Note 2, the Company determined the MRNCI should have been reported as a liability under ASC 480 – Distinguishing Liabilities From Equity (“ASC 480”) at June 2022. The Company is correcting its classification of the MRNCI from equity to a liability. The correction had an immaterial impact on fiscal 2022 third quarter net income available to common shareholders which increased by approximately $62,000, with no impact on net cash flows, and resulted in the removal of Non-controlling
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interest from the Condensed Consolidated Unaudited Statement of Shareholders’ Equity and Total Shareholders’ Equity. The following tables reflect the correction of the MRNCI from equity to liability in the June 2022 10-Q (in millions except for per share amounts):
As Reported As Corrected
Current mandatorily redeemable non-controlling interest $ — $ 1.7 $ 1.7
Total current liabilities $ 69.1 $ 1.7 $ 70.7
Deferred income tax liability, net $ 2.9 $ (0.2) $ 2.8
Retained earnings $ 92.2 $ 0.1 $ 92.3
Total parent shareholders' equity $ 88.1 $ 0.1 $ 88.1
Non-controlling interest $ 11.0 $ (11.0) $ —
Total shareholders' equity $ 99.1 $ (10.9) $ 88.1
Three months ended June 2022 Nine months ended June 2022
As Reported As Corrected As Reported As Corrected
Income tax expense (benefit) $ 2.4 $ (0.2) $ 2.2 $ 5.0 $ (0.2) $ 4.8
Nine months ended June 2022
As Reported As Corrected
Deferred income taxes $ 1.4 $ (0.2) $ 1.2
Net cash flows from (used in) operating activities $ 7.1 $ — $ 7.1
/1/ Items may not sum across due to rounding
/2/ Line item prior to net income attributable to non-controlling interest
The Company has elected to present the MRNCI liability at fair value under ASC 825 – Financial Instruments (“ASC 825”) as it believes this best represents the potential future liability and cash flows. As such, the MRNCI balance at September 2022 represents the fair value of the remaining future membership interest redemptions and other amounts due noncontrolling interest holders through April 2026. The Company calculates the estimated fair value of the MRNCI based on a discounted cash flow valuation technique using the best information available at the reporting date, and records changes in the fair value of the MRNCI as a component of other expense (income) in the Consolidated Statement of Operations. The Company estimates the probability and timing of future redemptions and earnings of Team Sledd based on management’s knowledge and assumptions of certain events as of each reporting date, including the timing of any future redemptions and an appropriate discount rate. At September 2022, the difference between the contractual amount due under the MRNCI and the fair value was approximately $0.1 million. The MRNCI is classified as Level 3 because of
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the Company’s reliance on unobservable assumptions. The following table presents changes in the fair value of the MRNCI since the Control Date (in millions):
Initial measurement at the Control Date (see Note 2) $ 10.4
Distributions to non-controlling interest (0.7)
Change in fair value 1.5
Fair value of MRNCI as of September 30, 2022 $ 11.2
Less current portion at fair value (1.7)
(w) Business Combinations:
The acquisition method of accounting for business combinations under ASC 805 – Business Combinations (“ASC 805”) requires management to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which the Company is allowed to adjust the provisional amounts recognized for a business combination).
(x) Accounting Pronouncements:
Recent Accounting Pronouncements
In June 2016, the FASB issued 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. ACQUISITION
The Company and Chas. M. Sledd Company (“Sledd”), a West Virginia wholesale distributor serving the convenience store industry, jointly own and operate Team Sledd, LLC (“Team Sledd”), a limited liability company which owns and operates Sledd’s wholesale distribution business.
Pursuant to an operating agreement between the Company and Sledd, certain membership interests in Team Sledd may be redeemed over a period of years, with such redemptions being funded from the operations of Team Sledd. Any such redemptions would result in a corresponding increase in AMCON’s ownership percentage in Team Sledd. In May 2022 (the “Control Date”), Team Sledd redeemed additional membership interests from certain members. Prior to May 2022, the Company had a minority interest in Team Sledd, which had been accounted for under the equity method. As a result of the May 2022 redemption, the Company became the majority owner of Team Sledd with a controlling interest of approximately 56%. The Company provided no additional consideration to acquire control of Team Sledd. The costs incurred to effectuate the acquisition were not significant and were expensed as incurred. The acquisition expands the Company’s footprint and enhances our ability to service customers in the Mid-Atlantic region of the United States.
The transaction was accounted for in accordance with ASC 805 and the Company measured the fair value of its previously held equity interest and the related noncontrolling interest using the discounted cash flow methodology with the assistance of independent valuation consultants. The total fair value of Team Sledd was approximately $23.3 million, which resulted in a gain of approximately $2.4 million related to the fair value remeasurement of the Company’s ownership interest in Team Sledd. The gain was recorded as a component of other income in the Company’s Consolidated Statement of Operations for fiscal 2022. In connection with the transaction, the Company recorded a deferred tax liability of approximately $0.6 million which will be recognized in future periods when the associated taxes become due. Inputs used
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to measure the acquisition-date fair value of the Company’s previously held equity interest and the related non-controlling interest in the entity included sales growth, gross profit estimates, economic and industry conditions, working capital requirements and the contractual requirements of the operating agreement. Team Sledd is being reported as a component of the Company’s Wholesale Segment.
The following tables summarize the acquisition-date fair value of Team Sledd, the fair value of Team Sledd’s assets and liabilities at the Control Date, and the resulting goodwill. The fair values are based on estimates and are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date).
Acquisition-date fair value of non-controlling interest $ 10,419,139
Acquisition-date fair value of previously held interest 12,897,443
Fair value of Team Sledd at the Control Date $ 23,316,582
Amounts of identifiable assets and liabilities at fair value:
Prepaid and other current assets 2,533,205
Operating lease right-of use assets 1,501,996
Other intangible assets 1,664,000
Total identifiable net assets $ 22,475,582
Accounts receivable were recorded at their fair value representing the amount we expect to collect. Gross contractual amounts receivable were approximately $1.7 million more than their acquisition-date fair value.
Goodwill totaling approximately $0.8 million arose from the acquisition and primarily represents synergies and economies of scale generated through reductions in selling, general, and administrative expenses. This goodwill has been assigned to the Company’s Wholesale Segment and is deductible for tax purposes.
Other intangible assets acquired consisted of the following:
Acquisition-Date Useful Life
Other Intangible Asset Fair Value (Years)
Non-competition agreement 222,000 3
3. EARNINGS PER SHARE:
Basic earnings per share available to common shareholders is calculated by dividing net income by the weighted average number of common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing income from operations by the sum of the weighted average number of common shares outstanding and the weighted average dilutive equity awards.
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For Fiscal Years
Basic Basic
Weighted average number of common shares outstanding 567,697 550,551
Net earnings per share available to common shareholders $ 29.37 $ 28.24
For Fiscal Years
Diluted Diluted
Weighted average number of common shares outstanding 567,697 550,551
Weighted average number of shares outstanding 583,062 568,103
Net earnings per share available to common shareholders $ 28.59 $ 27.36
4. PROPERTY AND EQUIPMENT, NET:
Property and equipment at September 2022 and September 2021 consisted of the following:
During fiscal 2022, the Company capitalized approximately $0.1 million of interest on funds borrowed to finance certain capital expenditures. Capitalized interest is recorded as part of an asset’s cost and will be depreciated over the asset’s useful life.
5. LEASES:
The Company’s wholesale segment leases certain warehouse facilities, office space, vehicles and office equipment. The Company’s retail segment leases store space in various shopping center complexes and certain office space. Certain of the warehouse and retail store leases include one or more options to renew or terminate the applicable lease agreement, with the exercise of such options at the Company’s discretion. The Company’s leases do not contain any significant residual value guarantees nor do they impose any significant restrictions or covenants other than those customarily found in similar types of leases.
The operating ROU lease assets and liabilities recorded on the Company’s consolidated balance sheets consist of fixed lease payments. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheets and are expensed on a straight-line basis over the lease term. Additionally, certain leases contain variable payments such as vehicle leases with per-mile charges or retail leases with an additional rent payment based on store performance. These variable payments are expensed as incurred. The Company combines lease components and non-lease components for all
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asset classes for purposes of recognizing lease assets and liabilities. The Company determines its incremental borrowing rates based on information available at the lease commencement date in calculating the present value of lease payments. The Company reviews its ROU lease assets for indicators of impairment in the same manner as its other property and equipment as described in Note 1.
Leases consist of the following:
Assets Classification September 2022 September 2021
Liabilities
Current:
Non-current:
The components of lease costs were as follows:
Maturities of lease liabilities as of September 2022 were as follows:
Operating Leases
Total lease payments 21,956,818
Less: interest (1,714,624)
Present value of lease liabilities $ 20,242,194
Weighted-average remaining lease term and weighted-average discount rate information regarding the Company’s leases were as follows:
Weighted-average remaining lease term (years):
Operating 4.0 4.0
Discount Rate
Weighted-average discount rate:
Other information regarding the Company’s leases were as follows:
Operating cash flows used by operating leases $ 6,704,890 $ 6,490,457
Lease liabilities arising from obtaining new ROU assets:
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6. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill at September 2022 and September 2021 was as follows:
September September
Acquisition of Team Sledd, LLC 841,000 —
Other intangible assets at September 2022 and September 2021 consisted of the following:
September September
Trademarks and tradenames (Retail Segment) 500,000 500,000
Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. Goodwill recorded on the Company’s consolidated balance sheets represents amounts allocated to its wholesale reporting unit which totaled approximately $5.3 million and $4.4 million at September 2022 and September 2021, respectively. The Company determined that the estimated fair value of its wholesale reporting unit exceeded its carrying value at both September 2022 and September 2021.
At September 2022, identifiable intangible assets considered to have finite lives were represented by a customer list which is being amortized over fifteen years and a non-competition agreement which is being amortized over three years. These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted. Amortization expense related to these assets was $0.1 million during fiscal 2022.
Estimated future amortization expense related to identifiable intangible assets with finite lives was as follows at September 2022:
September