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.
Overview
Turning Point Brands, Inc. (the "Company," "we," "our," or "us") is a leading
manufacturer, marketer and distributor of branded consumer products. We sell a
wide range of products to adult consumers consisting of staple products with our
iconic brands Zig-Zag® and Stoker's® to our next generation products to fulfill
evolving consumer preferences. Among other markets, we compete in the
alternative smoking accessories and Other Tobacco Products ("OTP") industries.
The alternative smoking accessories market is a dynamic market experiencing
robust secular growth driven by cannabinoid legalization in the U.S. and Canada,
and positively evolving consumer perception and acceptance in North America. The
OTP industry, which consists of non-cigarette tobacco products, exhibited low
double-digit consumer unit growth in 2020 as reported by Management Science
Associates, Inc. ("MSAi"), a third-party analytics and information company. Our
three focus segments are led by our core, proprietary brands: Zig-Zag® in the
Zig-Zag Products segment; Stoker's® along with Beech-Nut® and Trophy® in the
Stoker's Products segment; and Nu-XTM, Solace® along with our distribution
platforms (Vapor Beast®, VaporFi® and Direct Vapor®) in the NewGen Products
segment. Our businesses generate solid cash flow which we use to finance
acquisitions, increase brand support, expand our distribution infrastructure,
and strengthen our capital position. We currently ship to approximately 800
distributors with an additional 200 secondary, indirect wholesalers in the U.S.
that carry and sell our products. Under the leadership of a senior management
team with extensive experience in the consumer products, alternative smoking
accessories and tobacco industries, 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 Nu-X Ventures LLC ("Nu-X"), a new wholly
owned subsidiary dedicated to the development, production and sale of
alternative products and acquisitions in related spaces. The creation of Nu-X
allows us to leverage our expertise in traditional OTP management to alternative
products. Our management team has extensive 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 enhanced Nu-X's strong and nimble development
engine.
We believe there are meaningful opportunities to grow through acquisitions and
joint ventures across all product categories. As of December 31, 2020, our
products are available in approximately 190,000 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, and we have a growing e-commerce business.
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Products
We operate in three segments: Zig-Zag Products, Stoker's Products and NewGen
Products. In our Zig-Zag Products segment, we principally market and distribute
(i) rolling papers, tubes, and related products; and (ii) finished cigars and
make-your-own ("MYO") cigar wraps. In our Stoker's Products segment, we (i)
manufacture and market moist snuff tobacco ("MST") and (ii) contract for and
market loose leaf chewing tobacco products. 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.
Operations
Our core Zig-Zag Products and Stoker's Products segments primarily generate
revenues from the sale of our products to wholesale distributors who, in turn,
resell the products to retail operations. In our NewGen Products segment, 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 B2C revenue stream with the addition of the Vapor-Fi online
platform. The acquisition of Solace provided us with a line of leading liquids
and a powerful new product development 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 primarily of our moist snuff tobacco operations
located in Dresden, Tennessee, and 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;
• Freight and shipping costs and the availability of adequate freight for our
shipments;
• 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; and
• Our ability to integrate acquisitions.
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Recent Developments
Share Repurchase Authorization Increase
On October 25, 2021, the Board of Directors of Turning Point Brands increased
the Company's share repurchase authorization by $30.7 million to an aggregate
amount of $50.0 million, including approximately $19.3 million available for
repurchases under the Board's previous authorization approved on February 25,
2020.
The repurchase authorization permits shares to be repurchased in open market or
private transactions, through block trades, and pursuant to any trading plan or
other arrangements. The timing, manner, price and amount of any repurchases will
be determined by the Company's management in its discretion and will be subject
to economic and market conditions, stock price, applicable legal requirements
and other factors. The repurchase authorization does not obligate the Company to
purchase any specific number of shares and may be suspended or discontinued at
any time.
Final Rule Related to PACT Act Published
On October 21, 2021, the United States Postal Service ("USPS") published a Final
Rule entitled "Treatment of E-Cigarettes in the Mail," which followed its
earlier publication of the Proposed Rule on February 19, 2021. This Final Rule
was required as a result of the inclusion of Division FF, Title VI (Preventing
Online Sales of E-Cigarettes to Children or "POSECA") in the Further
Consolidated Appropriations Act, 2021. POSECA, among other things, expanded the
definition of "cigarettes" in the Jenkins Act and Prevent All Cigarette
Trafficking ("PACT") Act to expressly capture "electronic nicotine delivery
systems," i.e., ENDS. Consistent with the Proposed Rule, the Final Rule extends
the existing prohibition on and exceptions to the mailing of "cigarettes" via
USPS to ENDS products, other than the Consumer Testing and Public Health
exceptions. Specifically, the Final Rule extends the following exceptions to the
prohibition on mailing of ENDS products: the Business/Regulatory Purposes
Exception, the Certain Individuals Exception, and the exception for intra-Alaska
and intra-Hawaii shipments. While the Final Rule is largely in line with our
expectations, we expect a transition period as we adjust our logistics.
Unitabac
On July 23, 2021, we acquired certain assets of Unitabac, a marketer of
mass-market cigars, for $10.7 million in total consideration, comprised of $9.6
million in cash and $1.1 million of capitalized transaction costs. The
acquisition is comprised of a robust portfolio of cigarillo products and all
related intellectual property, including Cigarillo Non-Tip (NT) Homogenized
Tobacco Leaf (HTL) products and Rolled Leaf and Natural Leaf Cigarillo Products.
Old Pal
On July 21, 2021, we invested $8 million in Old Pal Holding Company LLC ("Old
Pal"), a leading brand in the cannabis lifestyle space. We invested in the form
of a convertible note which includes additional follow-on investment rights. Old
Pal is a leading brand in the cannabis space that operates a non-plant touching
licensing model. Our investment will enable Old Pal to expand product offerings
in existing states, which include California, Nevada, Michigan, Oklahoma, Ohio,
Washington and Massachusetts, and will help create the infrastructure necessary
to support continued territory and product expansion.
Direct Value Wholesale
In April 2021, ReCreation Marketing ("ReCreation"), a VIE for which we are
considered the primary beneficiary, purchased 100% of the equity interest of
Westhem Ventures LTD d/b/a Direct Value Wholesale ("DVW") for $3.9 million
satisfied through $3.5 million paid in cash and $0.5 million in accrued
consideration to be paid during 2021. DVW is Canadian distribution entity that
operates in markets not primarily served by ReCreation. The acquisition expands
ReCreation's markets in Canada.
Docklight Brands, Inc.
On April 19, 2021, we invested $8.7 million in Docklight Brands, Inc., a
pioneering consumer products company with celebrated brands including Marley
Natural® cannabis and Marley™ CBD. We have additional follow-on investment
rights. As part of the investment, we have obtained exclusive U.S. distribution
rights for Docklight's Marley™ CBD topical products.
Senior Secured Notes and 2021 Revolving Credit Facility
On February 11, 2021, we closed a private offering (the "Offering") of $250
million aggregate principal amount of our 5.625% senior secured notes due 2026
(the "Senior Secured Notes"). The Senior Secured Notes bear interest at a rate
of 5.625% and will mature on February 15, 2026. In connection with the Offering,
we also entered into a new $25 million senior secured revolving credit facility
(the "2021 Revolving Credit Facility") with the lenders party thereto (the
"Lenders") and Barclays Bank PLC, as administrative agent and collateral agent
(in such capacity, the "Agent"). The 2021 Revolving Credit Facility provides for
a revolving line of credit of up to $25.0 million. We used a portion of the
proceeds from the issuance of the Senior Secured Notes to prepay all outstanding
amounts under and terminate the 2018 First Lien Credit Facility in the first
quarter of 2021 in the amount of $130.0 million, and the transaction resulted in
a $5.7 million loss on extinguishment of debt. Refer to the "Long-Term Debt"
section for a more complete description of our Senior Secured Notes and 2021
Revolving Credit Facility.
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Premarket Tobacco Applications
We submitted Premarket Tobacco Applications ("PMTAs") covering 250 products to
the FDA prior to the September 9, 2020 filing deadline. The PMTAs cover a broad
assortment of products in the vapor category including multiple proprietary
e-liquid offerings in varying nicotine strengths, technologies and sizes;
proprietary replacement parts and components of open system tank devices through
partnerships with two leading manufacturers for exclusive distribution of
products in the United States; and a closed system e-cigarette, covering $0.7
million of inventory that was quarantined as of September 30, 2021. On September
14, 2021, the FDA issued a Marketing Denial Order ("MDO") for certain of the
Company's proprietary e-liquid products subject of these PMTAs. The Company
filed a Petition for Review in the Sixth Circuit Court of Appeals on September
23, 2021, followed by an Emergency Motion for a Stay Pending Review on September
30, 2021. On October 7, 2021, we were informed that the FDA had rescinded its
September 14 MDO. We therefore withdrew both the Petition and Emergency Stay on
October 8, 2021. The Rescission Letter indicated that the FDA had found
additional relevant information that was not adequately assessed. The
Rescission Letter further clarified that the FDA presently has no intention of
initiating any regulatory enforcement action against the products.
Critical Accounting Policies and Uses of Estimates
Inventories
Inventories are stated at the lower of cost or net realizable value. Effective
January 1, 2021, the Company changed its method of accounting for inventory
using the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO")
method. The Company applied this change retrospectively to all prior periods
presented, which is discussed further in Note 6, "Inventories" in the Notes to
the Consolidated Financial Statements included in this Quarterly Report. Leaf
tobacco is presented in current assets in accordance with standard industry
practice, notwithstanding the fact that such tobaccos are carried longer than
one year for the purpose of curing.
There have been no other 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 2020
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.
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Results of Operations
Comparison of the Three Months Ended September 30, 2021, to the Three Months
Ended September 30, 2020
The table and discussion set forth below displays our consolidated results of
operations (in thousands):
Three Months Ended September 30,
2021 2020 % Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products $ 42,234 $ 35,973 17.4 %
Stoker's products 30,472 29,764 2.4 %
NewGen products 37,198 38,437 -3.2 %
Total net sales 109,904 104,174 5.5 %
Cost of sales 55,635 55,867 -0.4 %
Gross profit
Zig-Zag products 23,703 21,263 11.5 %
Stoker's products 17,104 16,042 6.6 %
NewGen products 13,462 11,002 22.4 %
Total gross profit 54,269 48,307 12.3 %
Selling, general, and administrative expenses 31,894 32,286 -1.2 %
Operating income 22,375 16,021 39.7 %
Interest expense, net 5,397 3,539 52.5 %
Investment income (157 ) (3 ) 5133.3 %
Gain on extinguishment of debt (375 ) - NM
Net periodic income, excluding service cost - 1,188 -100.0 %
Income before income taxes 17,510 11,297 55.0 %
Income tax expense 4,073 2,277 78.9 %
Consolidated net income 13,437 9,020 49.0 %
Net loss attributable to non-controlling interest (31 ) - NM
Net income attributable to Turning Point Brands, Inc. $ 13,468 $ 9,020 49.3 %
Net Sales: For the three months ended September 30, 2021, consolidated net
sales increased to $109.9 million from $104.2 million for the three months ended
September 30, 2020, an increase of $5.7 million or 5.5%. The increase in net
sales was primarily driven by increased sales volume in the Zig-Zag Products
segment.
For the three months ended September 30, 2021, net sales in the Zig-Zag Products
segment increased to $42.2 million from $36.0 million for the three months ended
September 30, 2020, an increase of $6.3 million or 17.4%. For the three months
ended September 30, 2021, volume increased 17.0% and price/mix increased 0.4%.
The increase in net sales was led by our Canadian business which benefited from
the consolidation of ReCreation in the current year period. This growth was
complemented by double-digit growth in U.S. rolling papers and our E-Commerce
business.
For the three months ended September 30, 2021, net sales in the Stoker's
Products segment increased to $30.5 million from $29.8 million for the three
months ended September 30, 2020, an increase of $0.7 million or 2.4%. For the
three months ended September 30, 2021, volume decreased 4.1% and price/mix
increased 6.5%. The increase in net sales was driven by the continuing
double-digit growth of Stoker's® MST offset by single-digit decline in
loose-leaf chewing tobacco.
For the three months ended September 30, 2021, net sales in the NewGen products
segment decreased to $37.2 million from $38.4 million for the three months ended
September 30, 2020, a decrease of $1.2 million or 3.2%. The decrease in net
sales was primarily the result of declines in the vape distribution businesses
as a result of strong B2C orders during stay-at-home provisions in the prior
year.
Gross Profit: For the three months ended September 30, 2021, consolidated gross
profit increased to $54.3 million from $48.3 million for the three months ended
September 30, 2020, an increase of $6.0 million or 12.3%. Gross profit as a
percentage of revenue increased to 49.4% for the three months ended September
30, 2021, compared to 46.4% for the three months ended September 30, 2020 driven
by increased margin in the NewGen Products and Stoker's Products segments.
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For the three months ended September 30, 2021, gross profit in the Zig-Zag
Products segment increased to $23.7 million from $21.3 million for the three
months ended September 30, 2020, an increase of $2.4 million or 11.5%. Gross
profit as a percentage of net sales decreased to 56.1% of net sales for the
three months ended September 30, 2021, from 59.1% of net sales for the three
months ended September 30, 2020, as a result of the consolidation of ReCreation
in the current year period which operates at lower margins than our traditional
business.
For the three months ended September 30, 2021, gross profit in the Stoker's
Products segment increased to $17.1 million from $16.0 million for the three
months ended September 30, 2020, an increase of $1.1 million or 6.6%. Gross
profit as a percentage of net sales increased to 56.1% of net sales for the
three months ended September 30, 2021, from 53.9% of net sales for the three
months ended September 30, 2020, primarily as a result of strong incremental
margin contribution of MST.
For the three months ended September 30, 2021, gross profit in the NewGen
products segment increased to $13.5 million from $11.0 million for the three
months ended September 30, 2020, an increase of $2.5 million or 22.4%. Gross
profit as a percentage of net sales increased to 36.2% of net sales for the
three months ended September 30, 2021, from 28.6% of net sales for the three
months ended September 30, 2020, primarily as a result of increased margins in
the vape distribution businesses.
Selling, General, and Administrative Expenses: For the three months ended
September 30, 2021, selling, general, and administrative expenses decreased to
$31.9 million from $32.3 million for the three months ended September 30, 2020,
a decrease of $0.4 million or 1.2%. Selling, general and administrative expenses
in the three months ended September 30, 2021 included $1.8 million of stock
options, restricted stock and incentives expense, $0.2 million of transaction
income and $1.0 million of expense related to PMTA. Selling, general and
administrative expenses in the three months ended September 30, 2020 included
$0.8 million of stock option, restricted stock and incentives expense, $0.6
million of transaction costs and $5.3 million of expense related to PMTA. The
increase in selling, general, and administrative expenses is the result of
variable costs in our online businesses as well as increased shipping costs from
PACT Act implementation for vape products and higher freight rates across all
segments combined with the impact of the consolidation of ReCreation in the
current year period.
Interest Expense, net: For the three months ended September 30, 2021, interest
expense, net increased to $5.4 million, from $3.5 million for the three months
ended September 30, 2020 as a result of the completion of the offering of the
Senior Secured Notes and related refinancing of the 2018 First Lien Credit
Facility which increased the Company's outstanding debt.
Investment Income: For the three months ended September 30, 2021, investment
income increased to $0.2 million, from $0.0 million for the three months ended
September 30, 2020.
Gain on Extinguishment of Debt: Gain on extinguishment of debt was $0.4 million
for the three months ended September 30, 2021 related to the entire repayment of
the $10 million Promissory Note from the acquisition of certain Durfort assets
for a total payment of $9.6 million, compared to $0.0 million for the three
months ended September 30, 2020.
Net Periodic Income: Net periodic income was $0.0 million for the three months
ended September 30, 2021 compared to $1.2 million for the three months ended
September 30, 2020.
Income Tax Expense: Our income tax expense of $4.1 million was 23.3% of income
before income taxes for the three months ended September 30, 2021 and included a
discrete tax benefit of $1.0 million relating to stock option exercises. Our
effective income tax rate was 20.2% for the three months ended September 30,
2020 and included a discrete tax benefit $0.6 million from the shutdown of the
pension plan.
Net Loss Attributable to Non-Controlling Interest: Net loss attributable to
non-controlling interest was $0.0 million for the three months ended September
30, 2021 compared to $0.0 million for the three months ended September 30, 2020.
Net Income Attributable to Turning Point Brands, Inc.: Due to the factors
described above, net income attributable to Turning Point Brands, Inc. for the
three months ended September 30, 2021 and 2020, was $13.5 million and $9.0
million, respectively.
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Comparison of the Nine Months Ended September 30, 2021, to the Nine Months Ended
September 30, 2020
The table and discussion set forth below displays our consolidated results of
operations (in thousands):
Nine Months Ended September 30,
2021 2020 % Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products $ 130,440 $ 92,290 41.3 %
Stoker's products 93,096 87,081 6.9 %
NewGen products 116,652 120,455 -3.2 %
Total net sales 340,188 299,826 13.5 %
Cost of sales 172,685 162,152 6.5 %
Gross profit
Zig-Zag products 76,342 53,066 43.9 %
Stoker's products 51,142 46,424 10.2 %
NewGen products 40,019 38,184 4.8 %
Total gross profit 167,503 137,674 21.7 %
Selling, general, and administrative expenses 95,900 95,436 0.5 %
Operating income 71,603 42,238 69.5 %
Interest expense, net 15,406 10,143 51.9 %
Investment income (292 ) (128 ) 128.1 %
Loss on extinguishment of debt 5,331 - NM
Net periodic income, excluding service cost - 997 -100.0 %
Income before income taxes 51,158 31,226 63.8 %
Income tax expense 11,151 7,412 50.4 %
Consolidated net income 40,007 23,814 68.0 %
Net loss attributable to non-controlling interest (598 ) - NM
Net income attributable to Turning Point Brands, Inc. $ 40,605 $ 23,814 70.5 %
Net Sales: For the nine months ended September 30, 2021, consolidated net sales
increased to $340.2 million from $299.8 million for the nine months ended
September 30, 2020, an increase of $40.4 million or 13.5%. The increase in net
sales was primarily driven by increased sales volume in the Zig-Zag Products
segment.
For the nine months ended September 30, 2021, net sales in the Zig-Zag Products
segment increased to $130.4 million from $92.3 million for the nine months ended
September 30, 2020, an increase of $38.2 million or 41.3%. For the nine months
ended September 30, 2021, volume increased 37.3% and price/mix increased 4.0%.
The increase in net sales was led by double-digit growth in sales of our MYO
cigar wraps business, which experienced COVID-related manufacturing disruption
in the prior year period. This growth was complemented by our Canadian business
which benefited from the consolidation of ReCreation in the current year period
and double-digit growth in U.S. rolling papers.
For the nine months ended September 30, 2021, net sales in the Stoker's Products
segment increased to $93.1 million from $87.1 million for the nine months ended
September 30, 2020, an increase of $6.0 million or 6.9%. For the nine months
ended September 30, 2021, volume increased 1.0% and price/mix increased 5.9%.
The increase in net sales was driven by the continuing double-digit growth of
Stoker's® MST offset by low single-digit decline in loose-leaf chewing tobacco.
For the nine months ended September 30, 2021, net sales in the NewGen products
segment decreased to $116.7 million from $120.5 million for the nine months
ended September 30, 2020, a decrease of $3.8 million or 3.2%. The decrease in
net sales was primarily the result of declines in the vape distribution
businesses as a result of strong B2C orders during stay-at-home provisions in
the prior year.
Gross Profit: For the nine months ended September 30, 2021, consolidated gross
profit increased to $167.5 million from $137.7 million for the nine months ended
September 30, 2020, an increase of $29.8 million or 21.7%. Gross profit as a
percentage of revenue increased to 49.2% for the nine months ended September 30,
2021, compared to 45.9% for the nine months ended September 30, 2020 driven by
increased margin in the Zig-Zag Products segment as a result of the Durfort
transaction in June 2020.
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For the nine months ended September 30, 2021, gross profit in the Zig-Zag
Products segment increased to $76.3 million from $53.1 million for the nine
months ended September 30, 2020, an increase of $23.3 million or 43.9%. Gross
profit as a percentage of net sales increased to 58.5% of net sales for the nine
months ended September 30, 2021, from 57.5% of net sales for the nine months
ended September 30, 2020, as a result of increased MYO cigar wraps sales
combined with margin increases as a result of the Durfort transaction in
September 2020.
For the nine months ended September 30, 2021, gross profit in the Stoker's
Products segment increased to $51.1 million from $46.4 million for the nine
months ended September 30, 2020, an increase of $4.7 million or 10.2%. Gross
profit as a percentage of net sales increased to 54.9% of net sales for the nine
months ended September 30, 2021, from 53.3% of net sales for the nine months
ended September 30, 2020, primarily as a result of strong incremental margin
contribution of MST.
For the nine months ended September 30, 2021, gross profit in the NewGen
products segment increased to $40.0 million from $38.2 million for the nine
months ended September 30, 2020, an increase of $1.8 million or 4.8%. Gross
profit as a percentage of net sales increased to 34.3% of net sales for the nine
months ended September 30, 2021, from 31.7% of net sales for the nine months
ended September 30, 2020, primarily as a result of increased margins in the vape
distribution businesses.
Selling, General, and Administrative Expenses: For the nine months ended
September 30, 2021, selling, general, and administrative expenses increased to
$95.9 million from $95.4 million for the nine months ended September 30, 2020,
an increase of $0.5 million or 0.5%. Selling, general and administrative
expenses in the nine months ended September 30, 2021 included $6.0 million of
stock options, restricted stock and incentives expense (including $1.1 million
for accelerated vesting of options for a departing executive), $1.1 million of
transaction expenses and $1.9 million of expenses related to PMTA. Selling,
general and administrative expenses in the nine months ended September 30, 2020
included $2.0 million of stock option, restricted stock and incentives expense,
$1.9 million of transaction costs and $14.4 million of expense related to PMTA.
The increase in selling, general, and administrative expenses is the result of
variable costs in our online businesses as well as increased shipping costs from
PACT Act implementation for vape products and higher freight rates across all
segments combined with the impact of the consolidation of ReCreation in the
current year period.
Interest Expense, net: For the nine months ended September 30, 2021, interest
expense, net increased to $15.4 million, from $10.1 million for the nine months
ended September 30, 2020 as a result of the completion of the offering of the
Senior Secured Notes and related refinancing of the 2018 First Lien Credit
Facility which increased the Company's outstanding debt.
Investment Income: For the nine months ended September 30, 2021, investment
income increased to $0.3 million, from $0.1 million for the nine months ended
September 30, 2020.
Loss on Extinguishment of Debt: Loss on extinguishment of debt was $5.3 million
for the nine months ended September 30, 2021 related primarily to the repayment
of the 2018 First Lien Credit Facility, compared to $0.0 million for the nine
months ended September 30, 2020.
Net Periodic Income: Net periodic income was $0.0 million for the nine months
ended September 30, 2021 compared to $1.0 million for the nine months ended
September 30, 2020.
Income Tax Expense: Our income tax expense of $11.2 million was 21.8% of income
before income taxes for the nine months ended September 30, 2021 and included a
discrete tax benefit of $6.2 million relating to stock option exercises. Our
effective income tax rate was 23.7% for the nine months ended September 30, 2020
and included a discrete tax deduction $0.9 million relating to stock option
exercises and a discrete tax benefit of $0.6 million from the shutdown of the
pension plan.
Net Loss Attributable to Non-Controlling Interest: Net loss attributable to
non-controlling interest was $0.6 million for the nine months ended September
30, 2021 compared to $0.0 million for the nine months ended September 30, 2020.
Net Income Attributable to Turning Point Brands, Inc.: Due to the factors
described above, net income attributable to Turning Point Brands, Inc. for the
nine months ended September 30, 2021 and 2020, was $40.6 million and $23.8
million, respectively.
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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 Revolving Credit Agreement contains financial covenants which use
Adjusted EBITDA calculations, and many of the carve-outs from the negative
covenants in the Senior Secured Notes Indenture and Revolving Credit Facility
are based off of EBITDA, Adjusted EBITDA and related metrics.
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 noted in the reconciliation below.
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.
Three Months Ended
(in thousands) September 30,
2021 2020
Net income attributable to Turning Point Brands, Inc. $ 13,468 $ 9,020
Add:
Interest expense, net
5,397 3,539
Gain on extinguishment of debt (375 ) -
Income tax expense 4,073 2,277
Depreciation expense 767 809
Amortization expense 477 477
EBITDA $ 23,807 $ 16,122
Components of Adjusted EBITDA
Other (a) - 1,188
Stock options, restricted stock, and incentives expense (b) 1,752 772
Transactional expenses (c) (232 ) 570
FDA PMTA (d) 960 5,271
Adjusted EBITDA $ 26,287 $ 23,923--------------------------------------------------------------------------------
(a) Represents non-cash pension expense (income) and foreign exchange hedging.
(b) Represents non-cash stock options, restricted stock, incentives expense and
Solace performance stock units.
(c) Represents the fees incurred for transaction expenses.
(d) Represents costs associated with applications related to FDA premarket
tobacco product application ("PMTA").
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Nine Months Ended
(in thousands) September 30,
2021 2020
Net income attributable to Turning Point Brands, Inc. $ 40,605 $ 23,814
Add:
Interest expense, net
15,406 10,143
Loss on extinguishment of debt 5,331 -
Income tax expense 11,151 7,412
Depreciation expense 2,313 2,482
Amortization expense 1,431 1,304
EBITDA $ 76,237 $ 45,155
Components of Adjusted EBITDA
Other (a) - 841
Stock options, restricted stock, and incentives expense (b) 6,015 1,987
Transactional expenses (c) 1,077 1,909
FDA PMTA (d) 960 14,435
Adjusted EBITDA $ 84,289 $ 64,327--------------------------------------------------------------------------------
(a) Represents non-cash pension expense (income) and foreign exchange hedging.
(b) Represents non-cash stock options, restricted stock, incentives expense and
Solace performance stock units.
(c) Represents the fees incurred for transaction expenses.
(d) Represents costs associated with applications related to FDA premarket
tobacco product application ("PMTA").
Liquidity and Capital Reserves
Our principal uses for cash are working capital, debt service, and capital
expenditures. We believe our cash on hand, cash flows from operations and
borrowing availability under our 2021 Revolving Credit Facility are adequate to
satisfy our operating cash requirements for the foreseeable future. As of
September 30, 2021, we had $130.6 million of cash on hand and have $21.4 million
of availability under the 2021 Revolving Credit Facility.
Our working capital, which we define as current assets less cash and current
liabilities, increased $15.2 million to $80.2 million at September 30, 2021,
compared with $65.0 million at December 31, 2020. The increase was primarily due
to the increase in inventories as a result of increased sales.
As of
September 30, December 31,
(in thousands) 2021 2020
Current assets $ 134,225 $ 121,638
Current liabilities 54,056 56,629
Working capital $ 80,169 $ 65,009Cash Flows from Operating Activities
For the nine months ended September 30, 2021, net cash provided by operating
activities was $49.6 million compared to net cash provided by operating
activities of $33.2 million for the nine months ended September 30, 2020, an
increase of $16.4 million, primarily due to higher net income resulting from
increased sales.
Cash Flows from Investing Activities
For the nine months ended September 30, 2021, net cash used in investing
activities was $52.2 million compared to net cash used in investing activities
of $41.2 million for the nine months ended September 30, 2020, an increase of
$11.1 million, primarily due to the purchase of investments in our MSA escrow
account which reflects the change in restricted cash.
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Cash Flows from Financing Activities
For the nine months ended September 30, 2021, net cash provided by financing
activities was $76.3 million compared to net cash used in financing activities
of $16.9 million for the nine months ended September 30, 2020, an increase in
cash flow of $93.2 million, primarily due to the net proceeds from the Senior
Secured Notes partially offset by the repayment in full of the 2018 First Lien
Term Loan in the first quarter of 2021 and the repurchase of common stock during
2021.
Dividends and Share Repurchase
The most recent dividend of $0.055 per common share was paid on October 8, 2021,
to shareholders of record at the close of business on September 17, 2021.
On February 25, 2020, our Board of Directors approved a $50.0 million share
repurchase program, which is intended for opportunistic execution based upon a
variety of factors including market dynamics. The program is subject to the
ongoing discretion of the Board. The total number of shares repurchased for the
three months ended September 30, 2021, was 125,000 shares for a total cost of
$6.4 million and an average price per share of $51.16. $19.3 million remains
available for share repurchases under the program at September 30, 2021.
Long-Term Debt
As of September 30, 2021, we were in compliance with the financial and
restrictive covenants of the Senior Secured Notes and 2021 Revolving Credit
Facility. The following table provides outstanding balances of our debt
instruments.
September 30, December 31,
2021 2020
Senior Secured Notes $ 250,000 $ -
2018 First Lien Term Loan - 130,000
Convertible Senior Notes 172,500 172,500
Note payable - Promissory Note - 10,000
Note payable - Unsecured Loan 7,485 7,485
Gross notes payable and long-term debt 429,985 319,985
Less deferred finance charges (8,947 ) (5,873 )
Less current maturities (7,485 ) (12,000 )
Notes payable and long-term debt $ 413,553 $ 302,112
Senior Secured Notes
On February 11, 2021, we closed a private offering (the "Offering") of $250
million aggregate principal amount of our 5.625% senior secured notes due 2026
(the "Senior Secured Notes"). The Senior Secured Notes bear interest at a rate
of 5.625% and will mature on February 15, 2026. Interest on the Senior Secured
Notes is payable semi-annually in arrears on February 15 and August 15 of each
year, commencing on August 15, 2021.We used the proceeds from the Offering (i)
to repay all obligations under and terminate the 2018 First Lien Credit
Facility, (ii) to pay related fees, costs, and expenses and (iii) for general
corporate purposes.
Obligations under the Senior Secured Notes are guaranteed by the Company's
existing and future wholly-owned domestic subsidiaries (the "Guarantors") that
guarantee any Credit Facility (as defined in the Indenture governing the Senior
Secured Notes or the "Senior Secured Notes Indenture") or capital markets debt
securities of the Company or Guarantors in excess of $15.0 million. The Senior
Secured Notes and the related guarantees are secured by first-priority liens on
substantially all of the assets of the Company and the Guarantors, subject to
certain exceptions.
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We may redeem the Senior Secured Notes, in whole or in part, at any time prior
to February 15, 2023, at a price equal to 100% of the principal amount of the
Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the
applicable redemption date, plus a "make-whole" premium. Thereafter, we may
redeem the Senior Secured Notes, in whole or in part, at established redemption
prices set forth in the Senior Secured Notes Indenture, plus accrued and unpaid
interest, if any. In addition, on or prior to February 15, 2023, we may redeem
up to 40% of the aggregate principal amount of the Senior Secured Notes with the
net cash proceeds from certain equity offerings at a redemption price equal to
105.625%, plus accrued and unpaid interest, if any to the redemption date;
provided, however, that at least 50% of the original aggregate principal amount
of the Senior Secured Notes (calculated after giving effect to the issuance of
any additional notes) remains outstanding. In addition, at any time and from
time to time prior to February 15, 2023, but not more than once in any
twelve-month period, we may redeem up to 10% of the aggregate principal amount
of the Senior Secured Notes at a redemption price of 103% of the aggregate
principal amount of Senior Secured Notes redeemed plus accrued and unpaid
interest, if any to but not including the redemption date, on the Senior Secured
Notes to be redeemed.
If we experience a change of control (as defined in the Senior Secured Notes
Indenture), we must offer to repurchase the Senior Secured Notes at a repurchase
price equal to 101% of the principal amount of the Notes to be repurchased, plus
accrued and unpaid interest.
The Indenture contains covenants that, among other things, restrict the ability
of the Company and its restricted subsidiaries to: (i) grant or incur liens;
(ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise
dispose of assets, including capital stock of subsidiaries; (iv) make certain
investments; (v) pay dividends, make distributions or redeem or repurchase
capital stock; (vi) engage in certain transactions with affiliates; and (vii)
consolidate or merge with or into, or sell substantially all of our assets to
another entity. These covenants are subject to a number of limitations and
exceptions set forth in the Indenture.
We incurred debt issuance costs attributable to the issuance of the Senior
Secured Notes of $6.4 million which are amortized to interest expense using the
effective interest method over the expected life of the Senior Secured Notes.
The Indenture provides for customary events of default.
2021 Revolving Credit Facility
In connection with the Offering, we also entered into a new $25 million senior
secured revolving credit facility (the "2021 Revolving Credit Facility") with
the lenders party thereto (the "Lenders") and Barclays Bank PLC, as
administrative agent and collateral agent (in such capacity, the "Agent"). The
2021 Revolving Credit Facility provides for a revolving line of credit of up to
$25.0 million. Letters of credit are limited to $10 million (and are a part of,
and not in addition to, the revolving line of credit). We have not drawn any
borrowings under the 2021 Revolving Credit Facility but do have letters of
credit of approximately $3.6 million outstanding under the facility. The 2021
Revolving Credit Facility will mature on August 11, 2025 if none of our
Convertible Senior Notes are outstanding, and if any Convertible Senior Notes
are outstanding, the date which is 91 days prior to the maturity date of July
15, 2024 for such Convertible Senior Notes.
Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate
of interest determined by reference to the Eurodollar rate plus an applicable
margin of 3.50% (with step-downs upon de-leveraging). We also have the option to
borrow at a rate determined by reference to the base rate.
The obligations under the 2021 Revolving Credit Agreement are guaranteed on a
joint and several basis by the Guarantors. The Company's and Guarantors'
obligations under the 2021 Revolving Credit Facility are secured on a pari passu
basis with the Senior Secured Notes.
The 2021 Revolving Credit Agreement contains covenants that are substantially
the same as the covenants in the Senior Secured Notes Indenture. The 2021
Revolving Credit Facility also requires the maintenance of a Consolidated
Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to
1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending
March 31, 2023) at the end of each fiscal quarter when extensions of credit
under the 2021 Revolving Credit Facility and certain drawn and undrawn letters
of credit (excluding (a) letters of credit that have been cash collateralized
and (b) letters of credit having an aggregate face amount less than $5,000,000)
in the aggregate outstanding exceeds 35% of the total commitments under the 2021
Revolving Credit Facility.
We incurred debt issuance costs attributable to the issuance of the 2021
Revolving Credit Facility of $0.5 million which are amortized to interest
expense using the effective interest method over the expected life of the 2021
Revolving Credit Facility.
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The 2021 Revolving Credit Agreement provides for customary events of default.
2018 Credit Facility
In the first quarter of 2021, we used a portion of the proceeds from the
issuance of the Senior Secured Notes to prepay all outstanding amounts under and
terminate the 2018 First Lien Credit Facility in the amount of $130.0 million,
and the transaction resulted in a $5.7 million loss on extinguishment of debt.
See Note 11, "Notes Payable and Long-Term Debt," in the Notes to Consolidated
Financial Statements included in this Quarterly Report for further discussion.
Convertible Senior Notes
In July 2019 we closed an offering of $172.5 million in aggregate principal
amount of our 2.50% Convertible Senior Notes due July 15, 2024 (the "Convertible
Senior Notes"). The Convertible Senior Notes bear interest at a rate of 2.50%
per year, payable semiannually in arrears on January 15 and July 15 of each
year, beginning on January 15, 2020. The Convertible Senior Notes will mature on
July 15, 2024, unless earlier repurchased, redeemed or converted. The
Convertible Senior Notes are senior unsecured obligations.
The Convertible Senior Notes are convertible into approximately 3,207,293 shares
of our voting common stock under certain circumstances prior to maturity at a
conversion rate of 18.593 shares per $1,000 principal amount of the Convertible
Senior Notes, which represents a conversion price of approximately $53.78 per
share, subject to adjustment under certain conditions, but will not be adjusted
for any accrued and unpaid interest. The conversion price is adjusted
periodically as a result of dividends paid by the us in excess of pre-determined
thresholds of $0.04 per share. Upon conversion, we may pay cash, shares of our
common stock or a combination of cash and stock, as determined by us at our
discretion. The conditions required to allow the holders to convert their
Convertible Senior Notes were not met as of September 30, 2021.
We early adopted ASU 2020-06 effective January 1, 2021 on a retrospective basis
to all periods presented. Under ASU 2020-06, the Company will account for the
Convertible Senior Notes entirely as a liability and will no longer separately
account for the Convertible Senior Notes with liability and equity components.
See Note 2, "Summary of Significant Accounting Policies," in the Notes to
Consolidated Financial Statements included in this Quarterly Report for further
discussion of the impact of the adoption of ASU 2020-06.
We incurred debt issuance costs attributable to the Convertible Senior Notes of
$5.9 million which are amortized to the interest expense using the effective
interest method over the expected life of the Convertible Senior Notes.
In connection with the Convertible Senior Notes offering, we entered into
privately negotiated capped call transactions with certain financial
institutions. The capped call transactions have a strike price of $53.78 per and
a cap price of $82.86 per share, and are exercisable when, and if, the
Convertible Senior Notes are converted. We paid $20.53 million for these capped
calls at the time they were entered into and charged that amount to additional
paid-in capital.
The indenture covering the Convertible Senior Notes contains customary events of
default.
Promissory Note
On June 10, 2020, in connection with the acquisition of certain Durfort assets,
we issued an unsecured subordinated promissory note ("Promissory Note") in the
principal amount of $10.0 million (the "Principal Amount"), with an annual
interest rate of 7.5%, payable quarterly, with the first interest payment due
September 10, 2020. The Principal Amount was payable in two $5.0 million
installments, with the first installment due 18 months after the closing date of
the acquisition (June 10, 2020), and the second installment due 36 months after
the closing date of the acquisition. The second installment was subject to
reduction for certain amounts payable to us as a holdback. We prepaid all
outstanding amounts under and terminated the Promissory Note in the third
quarter of 2021 in the amount of $9.6 million. The transaction resulted in a
$0.4 million gain on extinguishment of debt.
Unsecured Loan
On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for
an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act
of 2020 ("CARES"). On April 17, 2020, National Tobacco Company, L.P., a
wholly-owned subsidiary of the Company, entered into a loan agreement with
Regions Bank guaranteed by the Small Business Administration for a $7.5 million
unsecured loan. The proceeds of the loan were received on April 27, 2020. The
loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.
During 2021, we applied for forgiveness for the loan. On October 15, 2021, we
received notice that our application for forgiveness was fully approved. We
anticipate that the extinguishment of the unsecured loan will occur in the
fourth quarter of 2021.
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Off-balance Sheet Arrangements
During the nine months ended September 30, 2021, the Company did not execute any
forward contracts. At September 30, 2021, the Company had forward contracts for
the purchase of €3.3 million and sale of €3.6 million outstanding. The fair
value of the foreign currency contracts was based on quoted market prices and
resulted in an asset of $0.0 million included in Other current assets and
liability of $0.0 million included in Accrued liabilities at September 30, 2021.
During 2020, the Company executed various forward contracts for the purchase of
€19.7 million and sale of €21.4 million with maturity dates ranging from
December 2020 to November 2021. At December 31, 2020, the Company had forward
contracts for the purchase of €18.0 million and sale of €19.6 million
outstanding. The fair value of the foreign currency contracts is based on quoted
market prices and resulted in an asset of $0.4 million included in Other current
assets and liability of $0.0 million included in Accrued liabilities at December
31, 2020. The Company had interest rate swap contracts for a notional amount of
$70 million at December 31, 2020. The fair values of the interest rate swap
contracts are based upon quoted market prices and resulted in a liability of
$3.7 million as of December 31, 2020, included in other long-term liabilities.
The Company terminated the interest rate swap agreement in conjunction with the
prepayment of all outstanding amounts under to the 2018 First Lien Credit
Facility in the first quarter of 2021 in the amount of $3.6 million, and the
transaction resulted in a $5.7 million loss recorded in the loss on
extinguishment of debt. See Note 11, "Notes Payable and Long-Term Debt," in the
Notes to Consolidated Financial Statements included in this Quarterly Report for
further discussion.
Inflation
While the rate of inflation has increased recently, we believe that any effect
of inflation at current levels will be minimal. Historically, we have been able
to increase prices at a rate equal to or greater than that of inflation and
believe that we will continue to be able to do so for the foreseeable future. In
addition, we have been able to maintain a relatively stable variable cost
structure for our products due, in part, to our successful procurement with
regard to our tobacco products and, in part, to our existing contractual
agreement for the purchase of our premium cigarette papers. However, if the rate
of inflation were to increase materially, it could have an adverse effect on our
results of operations.
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