You should read the following discussion of the historical financial condition
and results of operations in conjunction with our historical consolidated
financial statements and accompanying notes, which are included elsewhere in
this Quarterly Report on Form 10-Q. In addition, this discussion includes
forward-looking statements subject to risks and uncertainties that may result in
actual results differing from statements we make. See "Cautionary Note Regarding
Forward-Looking Statements." Factors that could cause actual results to differ
include those risks and uncertainties discussed in "Risk Factors."
The following discussion relates to the unaudited financial statements of
Turning Point Brands, Inc., included elsewhere in this Quarterly Report on Form
10-Q. In this discussion, unless the context requires otherwise, references to
"our Company" "we," "our," or "us" refer to Turning Point Brands, Inc., and its
consolidated subsidiaries. References to "TPB" refer to Turning Point Brands,
Inc., without any of its subsidiaries. We were incorporated in 2004 under the
name North Atlantic Holding Company, Inc. On November 4, 2015, we changed our
name to Turning Point Brands, Inc. Many of the amounts and percentages in this
discussion have been rounded for convenience of presentation.
Organizational Structure
We, Turning Point Brands, Inc., are a holding company which owns North Atlantic
Trading Company, Inc. ("NATC"), and its subsidiaries, Turning Point Brands, LLC
("TPLLC"), and its subsidiaries, Standard Merger Sub, LLC ("SMS"), North
Atlantic Wrap Company, LLC ("NAWC"), TPB Services, LLC ("TPBS"), and Turning
Point Brands (Canada) Inc. ("TPBC"). NATC includes subsidiaries National
Tobacco Company, L.P. ("NTC"), National Tobacco Finance, LLC ("NTFLLC"), North
Atlantic Operating Company, Inc. ("NAOC"), North Atlantic Cigarette Company,
Inc. ("NACC"), and RBJ Sales, Inc. ("RBJ"). TPLLC includes subsidiaries Intrepid
Brands, LLC ("Intrepid"), TPB Beast, LLC ("VaporBeast"), TPB Shark, LLC, and its
subsidiaries (collectively, "Vapor Shark"), TPB International, LLC and its
subsidiaries (collectively, "IVG"), Nu-X Ventures LLC ("Nu-X"), Nu-Tech Holdings
LLC ("Nu-Tech"), and South Beach Holdings, LLC ("South Beach").
Overview
Turning Point Brands, Inc. (the "Company," "we," "our," or "us") is a leading,
independent provider of Other Tobacco Products ("OTP") and adult consumer
alternatives. We estimate the OTP industry generated approximately $11.5 billion
of manufacturer revenue in 2019. In contrast to manufactured cigarettes, which
have been experiencing declining volumes for decades based on data published by
the Alcohol and Tobacco Tax and Trade Bureau ("TTB"), the OTP industry is
demonstrating increased consumer appeal with low to mid-single digit consumer
unit growth as reported by Management Science Associates, Inc. ("MSAi"), a
third-party analytics and information company. We were the 6th largest
competitor in terms of total OTP consumer units sold during 2019. We sell a wide
range of products across the OTP spectrum; however, we do not sell cigarettes.
Our portfolio of brands includes some of the most widely recognized names in the
OTP industry, such as Zig-Zag®, Beech-Nut®, Stoker's®, Trophy®, VaporBeast® and
VaporFi®. We currently ship to approximately 900 distributors with an additional
100 secondary, indirect wholesalers in the U.S. that carry and sell our
products. We operate in three segments: (i) Smokeless products, (ii) Smoking
products, and (iii) NewGen products. Under the leadership of a senior management
team with an average of 24 years of experience in the tobacco industry, we have
grown and diversified our business through new product launches, category
expansions, and acquisitions while concurrently improving operational
efficiency.
We have identified additional growth opportunities in the emerging alternatives
market. In January 2019, we established our subsidiary, Nu-X, a new company and
wholly-owned subsidiary dedicated to the development, production and sale of
alternative products and acquisitions in related spaces. The creation of Nu-X
allows TPB to leverage its expertise in traditional OTP management to
alternative products. The TPB management team has over 100 years of experience
navigating federal, state and local regulations that are directly applicable to
the growing alternatives market. In July 2019, we acquired the assets of Solace
Technology ("Solace"). Solace is an innovative product development company which
established one of the top e-liquid brands and has since grown into a leader in
alternative products. Solace's legacy and innovation will enhance Nu-X's strong
and nimble development engine. In July 2019, we acquired a 30% stake in
ReCreation Marketing ("ReCreation). ReCreation is a specialty marketing and
distribution firm focused on building brands in the Canadian smoking, vaping and
alternative products categories. The investment will leverage ReCreation's
significant expertise in marketing and distributing tobacco and cannabis
products throughout Canada. The investment is part of Nu-X and we plan to make
additional investments, partnerships and acquisitions to drive the business of
Nu-X. These endeavors will enable us to continue to identify unmet customer
needs and provide quality products that we believe will result in genuine
customer satisfaction and foster the growth of revenue.
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We believe there are meaningful opportunities to grow our business organically
and through acquisitions and joint ventures across all product categories. As of
December 31, 2019, our products are available in approximately 185,000 U.S.
retail locations which, with the addition of retail stores in Canada, brings our
total North American retail presence to an estimated 210,000 points of
distribution. Our sales team targets widespread distribution to all traditional
retail channels, including convenience stores.
Products
We operate in three segments: Smokeless products, Smoking products and NewGen
products. In our Smokeless products segment, we (i) manufacture and market moist
snuff and (ii) contract for and market loose leaf chewing tobacco products. In
our Smoking products segment, we principally (i) market and distribute cigarette
papers, tubes, and related products; and (ii) contract for, market and
distribute finished cigars and MYO cigar wraps. In our NewGen products segment,
we (i) market and distribute CBD, liquid vapor products and certain other
products without tobacco and/or nicotine; (ii) distribute a wide assortment of
products to non-traditional retail via VaporBeast; and (iii) market and
distribute a wide assortment of products to individual consumers via the VaporFi
B2C online platform. Our portfolio of brands includes some of the most widely
recognized names in the OTP industry such as Stoker's® in the Smokeless segment,
Zig-Zag® in the Smoking segment, and VaporBeast®, VaporFi® and Solace© in the
NewGen segment.
Operations
Our core tobacco business (Smokeless and Smoking segments) primarily generates
revenues from the sale of our products to wholesale distributors who, in turn,
resell the products to retail operations. Our acquisition of VaporBeast in 2016
expanded our revenue streams as we began selling directly to non-traditional
retail outlets. Our acquisition of IVG in 2018 enhanced our business-to-consumer
revenue stream with the addition of the Vapor-Fi online platform. Our net sales,
which include federal excise taxes, consist of gross sales net of cash
discounts, returns, and selling and marketing allowances.
We rely on long-standing relationships with high-quality, established
manufacturers to provide the majority of our produced products. More than 80% of
our production, as measured by net sales, is outsourced to suppliers. The
remaining production consists of our moist snuff tobacco operations located in
Dresden, Tennessee, and Louisville, Kentucky and the proprietary e-liquids
operations located in Louisville, Kentucky. Our principal operating expenses
include the cost of raw materials used to manufacture the limited number of our
products which we produce in-house; the cost of finished products, which are
generally purchased goods; federal excise taxes; legal expenses; and
compensation expenses, including benefits and costs of salaried personnel. Our
other principal expenses include interest expense and other expenses.
Key Factors Affecting Our Results of Operations
We consider the following to be the key factors affecting our results of
operations:
? Our ability to further penetrate markets with our existing products;
? Our ability to introduce new products and product lines that complement our
core business;
? Decreasing interest in some tobacco products among consumers;
? Price sensitivity in our end-markets;
? Marketing and promotional initiatives, which cause variability in our results;
? General economic conditions, including consumer access to disposable income;
? Cost and increasing regulation of promotional and advertising activities;
? Cost of complying with regulation, including the "deeming regulations";
? Counterfeit and other illegal products in our end-markets;
? Currency fluctuations;
? Our ability to identify attractive acquisition opportunities in OTP; and
? Our ability to integrate acquisitions.
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Recent Developments
Durfort Holdings
In June 2020, we purchased certain tobacco assets and distribution rights from
Durfort Holdings S.R.L. ("Durfort") and Blunt Wrap USA for $47.8 million in
total consideration, comprised of $37.8 million in cash, including $1.8 million
of capitalized transaction costs, and a $10.0 million Promissory Note. With this
transaction, we acquired co-ownership in the intellectual property rights of all
of Durfort's and Blunt Wrap USA's HTL cigar wraps and cones. We also entered
into an exclusive Master Distribution Agreement to market and sell the original
Blunt Wrap® cigar wraps within the USA which is expected to be effective within
120 days of the closing. Durfort is an industry leader in alternative cigar and
cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator
of new products in the smoking alternative market since 1997 and has secured
patents in the USA and internationally for novel smoking wrappers and cones.
COVID-19 Impact
As a result of the extraordinary situation we are facing, our focus is on the
safety and well-being of our colleagues and the communities and customers we
serve. As an organization, we have implemented several changes to enhance safety
and mitigate health risk in our work environment. For our warehouse and
manufacturing operations, these include split shifts, temperature scans,
additional contactless hand sanitizing stations, protective equipment, social
distancing guidelines, and increased cleaning and sanitization. These changes
resulted in higher operational costs related to maintaining a safer work
environment and fulfilling orders.
We canceled all unnecessary travel and facilitated telecommuting where possible.
Like many companies, we have changed the way we communicate through increased
use of videoconferencing and have implemented tele-selling initiatives through
our sales force. Some of these changes that are proving to be efficient are
likely to remain in-place even after this crisis and lead to on-going cost
savings. We have also put a hold on new spending commitments as we cautiously
manage through this environment.
We hired additional employees in our Louisville facility and implemented
temporary wage increases for our hourly employees to meet increased demand. We
shifted production capacity to manufacture hand sanitizers and have donated
bottles to hospitals, nursing homes and first responders in our local
communities.
COVID-19 may impact our results. Our third-party cigar wrap manufacturer in the
Dominican Republic was temporarily shut down. Our supply chain has remained
operational otherwise. In-person selling has been dramatically dampened, which
may affect new product launches. Select budgeted annual price increases will be
delayed. Our B2C platforms have seen elevated sales levels from consumer shifts
to online purchasing and we gained market share. We continue to monitor this
challenging environment closely and will make necessary adjustments as needed to
make sure we are serving our employees and customers, while also protecting the
safety of employees and communities.
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Standard Diversified Inc. ("SDI") Reorganization
On July 16, 2020, we completed our merger with SDI, whereby SDI was merged into
a wholly-owned subsidiary of TPB in a tax-free downstream merger. Under the
terms of the agreement, the holders of SDI's Class A Common Stock and SDI's
Class B Common Stock (collectively, "SDI Common Stock") received in the
aggregate, in return for their SDI Common Stock, TPB Voting Common Stock ("TPB
Common Stock") at a ratio of 0.52095 shares of TPB Common Stock for each share
SDI Common Stock. SDI divested its assets prior to close such that the net
liabilities at closing did not exceed $25,000 (whole dollars) and the only
assets that it retained was the remaining TPB Common Stock holdings. We no
longer have a controlling shareholder and 245,234 shares of TPB Common Stock
were retired. The transaction significantly improved the public float of shares
outstanding and eliminated the overhang of a controlling holding company
structure.
Premarket Tobacco Application Deadline Extension
The United States District Court for the District of Maryland agreed to an FDA
request filed for a 120-day extension of the premarket tobacco application
deadline for many e-cigarettes, cigars and other tobacco products. FDA stated
that the extension was needed because of the impacts of the coronavirus on both
the agency and the industry. The Court-modified Remedy Order had the effect of
moving the premarket filing deadline from May 12, 2020 to September 9, 2020. FDA
subsequently issued Guidance in line with the modified Remedy Order.
Critical Accounting Policies and Uses of Estimates
There have been no material changes to our critical accounting policies and
estimates from the information provided in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in our 2019 Annual
Report on Form 10-K.
Recent Accounting Pronouncements
Refer to Note 2, "Summary of Significant Accounting Policies", of Notes to
Consolidated Financial Statements included in this Quarterly Report for a
description of recently issued accounting pronouncements, including those
recently adopted.
Results of Operations
Comparison of the Three Months Ended June 30, 2020, to the Three Months Ended
June 30, 2019
The table and discussion set forth below displays our consolidated results of
operations (in thousands):
Three Months Ended June 30,
2020 2019 % Change
Consolidated Results of Operations Data:
Net sales
Smokeless products $ 30,822 $ 26,176 17.7 %
Smoking products 27,403 25,363 8.0 %
NewGen products 46,738 41,800 11.8 %
Total net sales 104,963 93,339 12.5 %
Cost of sales 56,871 52,156 9.0 %
Gross profit
Smokeless products 16,664 14,063 18.5 %
Smoking products 15,671 13,738 14.1 %
NewGen products 15,757 13,382 17.7 %
Total gross profit 48,092 41,183 16.8 %
Selling, general, and administrative expenses 30,756 21,242 44.8 %
Operating income 17,336 19,941 -13.1 %
Interest expense, net 4,980 3,736 33.3 %
Investment income (34 ) (118 ) -71.2 %
Loss on extinguishment of debt - 150
Net periodic income, excluding service cost (104 ) (11 ) 845.5 %
Income before income taxes 12,494 16,184 -22.8 %
Income tax expense 3,267 2,979 9.7 %
Consolidated net income $ 9,227 $ 13,205 -30.1 %
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Net Sales: For the three months ended June 30, 2020, consolidated net sales
increased to $105.0 million from $93.3 million for the three months ended June
30, 2019, an increase of $11.6 million or 12.5%. The increase in net sales was
driven by increased volume across all segments in 2020.
For the three months ended June 30, 2020, net sales in the Smokeless products
segment increased to $30.8 million from $26.2 million for the three months ended
June 30, 2019, an increase of $4.6 million or 17.7%. For the three months ended
June 30, 2020, volume increased 13.9% and price/mix increased 3.8%. The increase
in net sales was driven by the continuing double-digit volume growth of
Stoker's® MST. Sales in chewing tobacco products were up mid-single digits as
compared to prior year.
For the three months ended June 30, 2020, net sales in the Smoking products
segment increased to $27.4 million from $25.4 million for the three months ended
June 30, 2019, an increase of $2.0 million or 8.0%. For the three months ended
June 30, 2020, volume increased 7.5% and price/mix increased 0.5%. The increase
in net sales is primarily related to double digit growth in US rolling papers
and Canada papers, partially offset by a $2.4 million decline in MYO cigar wraps
due to COVID-19 related supply disruption and a $0.4 million decline in
non-focus cigars and MYO.
For the three months ended June 30, 2020, net sales in the NewGen products
segment increased to $46.7 million from $41.8 million for the three months ended
June 30, 2019, an increase of $4.9 million or 11.8%. The increase in net sales
is the result of strong market share gains in our vape distribution business and
positive contributions from Solace and other Nu-X products.
Gross Profit: For the three months ended June 30, 2020, consolidated gross
profit increased to $48.1 million from $41.2 million for the three months ended
June 30, 2019, an increase of $6.9 million or 16.8%. Gross profit as a
percentage of revenue increased to 45.8% for the three months ended June 30,
2020, compared to 44.1% for the three months ended June 30, 2019.
For the three months ended June 30, 2020, gross profit in the Smokeless products
segment increased to $16.7 million from $14.1 million for the three months ended
June 30, 2019, an increase of $2.6 million or 18.5%. Gross profit as a
percentage of net sales increased to 54.1% of net sales for the three months
ended June 30, 2020, from 53.7% of net sales for the three months ended June 30,
2019, primarily as a as a result of strong incremental margin contribution of
MST.
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For the three months ended June 30, 2020, gross profit in the Smoking products
segment increased to $15.7 million from $13.7 million for the three months ended
June 30, 2019, an increase of $1.9 million or 14.1%. Gross profit as a
percentage of net sales increased to 57.2% of net sales for the three months
ended June 30, 2020, from 54.2% of net sales for the three months ended June 30,
2019, as a result of increased US rolling paper sales and a continued decline in
the low margin cigar business. For the three months ended June 30, 2020
non-focus cigar and MYO pipe sales declined $0.4 million as compared to the
three months ended June 30, 2019.
For the three months ended June 30, 2020, gross profit in the NewGen products
segment increased to $15.8 million from $13.4 million for the three months ended
June 30, 2019, an increase of $2.4 million or 17.7%. Gross profit as a
percentage of net sales increased to 33.7% of net sales for the three months
ended June 30, 2020, from 32.0% of net sales for the three months ended June 30,
2019 primarily due to an increase in mix of proprietary products and strong
growth from our higher gross margin B2C business. For the three months ended
June 30, 2020, gross profit included $3.6 million of tariff expenses compared to
$2.0 million for the three months ended June 30, 2019.
Selling, General, and Administrative Expenses: For the three months ended June
30, 2020, selling, general, and administrative expenses increased to $30.8
million from $21.2 million for the three months ended June 30, 2019, an increase
of $9.5 million or 44.8%. Selling, general and administrative expenses in the
three months ended June 30, 2020 included $0.8 million of stock options,
restricted stock and incentives expense, $0.3 million of transaction expenses
and $3.3 million of expense related to PMTA. Selling, general and administrative
expenses in the three months ended June 30, 2019 included $1.2 million of stock
option, restricted stock and incentives expense, $0.2 million of transaction
costs, $0.2 million in corporate and vapor restructuring and $1.3 million of new
product launch costs for Nu-X products. These costs were partially offset by a
net $5.5 million gain related to the settlement of the VMR Distribution and
Supply agreement during the second quarter 2019.
Interest Expense, net: For the three months ended June 30, 2020, as a result of
the amortization of the debt discount on the Convertible Senior Notes of $1.8
million, interest expense, net increased to $5.0 million, from $3.7 million for
the three months ended June 30, 2019.
Investment Income: Investment income relating to investment of the MSA deposits
was less than $0.1 million for the three months ended June 30, 2020, compared to
approximately $0.1 million for the three months ended June 30, 2019.
Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for
the three months ended June 30, 2020, compared to $0.2 million for the three
months ended June 30, 2019 related to the payment on the 2018 Second Lien Credit
Facility.
Net Periodic Income: Net periodic income was $0.1 million for the three months
ended June 30, 2020 and less than $0.1 million for the three months ended June
30, 2019.
Income Tax Expense: Our income tax expense of $3.3 million was 26.1% of income
before income taxes for the three months ended June 30, 2020. Our effective
income tax rate of 18.4% for the three months ended June 30, 2019 included a
discrete tax deduction $0.9 million relating to stock option exercises.
Consolidated Net Income: Due to the factors described above, consolidated net
income for the three months ended June 30, 2020 and 2019, was $9.2 million and
$13.2 million, respectively.
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Comparison of the Six Months Ended June 30, 2020, to the Six Months Ended June
30, 2019
The table and discussion set forth below displays our consolidated results of
operations (in thousands):
Six Months Ended June 30,
2020 2019 % Change
Consolidated Results of Operations Data:
Net sales
Smokeless products $ 57,317 $ 48,720 17.6 %
Smoking products 56,317 50,882 10.7 %
NewGen products 82,018 85,365 -3.9 %
Total net sales 195,652 184,967 5.8 %
Cost of sales 106,129 103,320 2.7 %
Gross profit
Smokeless products 30,538 26,136 16.8 %
Smoking products 31,803 27,222 16.8 %
NewGen products 27,182 28,289 -3.9 %
Total gross profit 89,523 81,647 9.6 %
Selling, general, and administrative expenses 63,150 49,671 27.1 %
Operating income 26,373 31,976 -17.5 %
Interest expense, net 9,974 7,592 31.4 %
Investment income (125 ) (262 ) -52.3 %
Loss on extinguishment of debt - 150
Net periodic income, excluding service cost (191 ) (22 ) 768.2 %
Income before income taxes 16,715 24,518 -31.8 %
Income tax expense 4,213 4,753 -11.4 %
Consolidated net income $ 12,502 $ 19,765 -36.7 %
Net Sales: For the six months ended June 30, 2020, consolidated net sales
increased to $195.7 million from $185.0 million for the six months ended June
30, 2019, an increase of $10.7 million or 5.8%. The increase in net sales was
primarily driven by increased sales volume in the Smoking and Smokeless
segments, partially offset by lower sales in the NewGen segment.
For the six months ended June 30, 2020, net sales in the Smokeless products
segment increased to $57.3 million from $48.7 million for the six months ended
June 30, 2019, an increase of $8.6 million or 17.6%. For the six months ended
June 30, 2020, volume increased 15.2% and price/mix increased 2.4%. The increase
in net sales was primarily driven by the continuing double-digit volume growth
of Stoker's® MST.
For the six months ended June 30, 2020, net sales in the Smoking products
segment increased to $56.3 million from $50.9 million for the six months ended
June 30, 2019, an increase of $5.4 million or 10.7%. For the six months ended
June 30, 2020, volume increased 9.2% and price/mix increased 1.5%. The increase
in net sales is primarily related to double digit growth in US and Canada
papers, partially offset by a $0.9 million decline in non-focus cigars and MYO
pipe.
For the six months ended June 30, 2020, net sales in the NewGen products segment
decreased to $82.0 million from $85.4 million for the six months ended June 30,
2019, a decrease of $3.3 million or 3.9%. The decrease in net sales is primarily
the result of the discontinuance of V2 at the end of the second quarter 2019.
Gross Profit: For the six months ended June 30, 2020, consolidated gross profit
increased to $89.5 million from $81.6 million for the six months ended June 30,
2019, an increase of $7.9 million or 9.6%. Gross profit as a percentage of
revenue increased to 45.8% for the six months ended June 30, 2020, compared to
44.1% for the six months ended June 30, 2019.
For the six months ended June 30, 2020, gross profit in the Smokeless products
segment increased to $30.5 million from $26.1 million for the six months ended
June 30, 2019, an increase of $4.4 million or 16.8%. Gross profit as a
percentage of net sales decreased to 53.3% of net sales for the six months ended
June 30, 2020, from 53.6% of net sales for the six months ended June 30, 2019,
primarily as a result of strong incremental margin contribution of MST.
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For the six months ended June 30, 2020, gross profit in the Smoking products
segment increased to $31.8 million from $27.2 million for the six months ended
June 30, 2019, an increase of $4.6 million or 16.8%. Gross profit as a
percentage of net sales increased to 56.5% of net sales for the six months ended
June 30, 2020, from 53.5% of net sales for the six months ended June 30, 2019,
as a result of increased US and Canada paper sales and a continued decline in
the low margin cigar business. For the six months ended June 30, 2020 non-focus
cigar and MYO pipe sales declined $0.9 million as compared to the six months
ended June 30, 2019.
For the six months ended June 30, 2020, gross profit in the NewGen products
segment decreased to $27.2 million from $28.3 million for the six months ended
June 30, 2019, a decrease of $1.1 million or 3.9%. Gross profit as a percentage
of net sales remained flat at 33.1% of net sales for the six months ended June
30, 2020 and June 30, 2019. For the six months ended June 30, 2020, gross profit
included $6.4 million of tariff expenses compared to $4.0 million for the six
months ended June 30, 2019.
Selling, General, and Administrative Expenses: For the six months ended June
30, 2020, selling, general, and administrative expenses increased to $63.2
million from $49.7 million for the six months ended June 30, 2019, an increase
of $13.5 million or 27.1%. Selling, general and administrative expenses in the
six months ended June 30, 2020 included $1.2 million of stock options,
restricted stock and incentives expense, $1.3 million of transaction expenses
and $9.2 million of expense related to PMTA. Selling, general and administrative
expenses in the six months ended June 30, 2019 included $1.9 million of stock
option, restricted stock and incentives expense, $1.1 million of transaction
costs, $1.2 million in corporate and vapor restructuring and $1.7 million of new
product launch costs for Nu-X products. These costs were partially offset by a
net $5.5 million gain related to the settlement of the VMR Distribution and
Supply agreement during the second quarter 2019.
Interest Expense, net: For the six months ended June 30, 2020, as a result of
the amortization of the debt discount on the Convertible Senior Notes of $3.5
million, interest expense, net increased to $10.0 million, from $7.6 million for
the six months ended June 30, 2019.
Investment Income: Investment income relating to investment of the MSA deposits
was $0.1 million for the six months ended June 30, 2020, compared to $0.3
million for the six months ended June 30, 2019.
Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for
the six months ended June 30, 2020, compared to $0.2 million for the six months
ended June 30, 2019 related to the payment on the 2018 Second Lien Credit
Facility.
Net Periodic Income: Net periodic income was $0.2 million for the six months
ended June 30, 2020 and less than $0.1 million for the six months ended June 30,
2019.
Income Tax Expense: Our income tax expense of $4.2 million was 25.2% of income
before income taxes for the six months ended June 30, 2020 and included a
discrete tax deduction of $3.7 million relating to stock option exercises. Our
effective income tax rate of 19.4% for the six months ended June 30, 2019
included a discrete tax deduction of $4.5 million relating to stock option
exercises.
Consolidated Net Income: Due to the factors described above, consolidated net
income for the six months ended June 30, 2020 and 2019, was $12.5 million and
$19.8 million, respectively.
EBITDA and Adjusted EBITDA
To supplement our financial information presented in accordance with generally
accepted accounting principles in the United States, or U.S. GAAP, we use
non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We
believe Adjusted EBITDA provides useful information to management and investors
regarding certain financial and business trends relating to our financial
condition and results of operations. Adjusted EBITDA is used by management to
compare our performance to that of prior periods for trend analyses and planning
purposes and is presented to our Board of Directors. We believe that EBITDA and
Adjusted EBITDA are appropriate measures of operating performance because they
eliminate the impact of expenses that do not relate to operating performance. In
addition, our credit agreements contain financial covenants which use Adjusted
EBITDA calculations.
We define "EBITDA" as net income before interest expense, loss on extinguishment
of debt, provision for income taxes, depreciation, and amortization. We define
"Adjusted EBITDA" as net income before interest expense, loss on extinguishment
of debt, provision for income taxes, depreciation, amortization, other non-cash
items, and other items we do not consider ordinary course in our evaluation of
ongoing operating performance.
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Non-U.S. GAAP measures should not be considered a substitute for, or superior
to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA
excludes significant expenses required to be recorded in our financial
statements by U.S. GAAP and is subject to inherent limitations. Other companies
in our industry may calculate this non-U.S. GAAP measure differently than we do
or may not calculate it at all, limiting its usefulness as a comparative
measure. The tables below provide reconciliations between net income and
Adjusted EBITDA.
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