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® and 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
mid-single-digit consumer unit growth over the year period ending 2021 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 our
distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) along with
Solace® in the NewGen Products segment. Our businesses generate solid cash flows
which we use to invest in our business, 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 believe there are meaningful opportunities to grow through acquisitions and
joint ventures across all product categories. As of December 31, 2021, our
products are available in approximately 195,000 U.S. retail locations which,
with the addition of retail stores in Canada, brings our total North American
retail presence to an estimated 215,000 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.
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 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.
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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. 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 in
2019 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;
• Marketing and promotional initiatives, which cause variability in our results;
• General economic conditions, including consumer access to disposable income and
other conditions affecting purchasing power such as inflation;
• Supply chain challenges and freight costs;
• Price sensitivity in our end-markets;
• Cost and increasing regulation of promotional and advertising activities;
• Cost of complying with regulation, including the "deeming regulation";
• Increasing and unpredictable regulation of NewGen products;
• Counterfeit and other illegal products in our end-markets;
• Currency fluctuations;
• Our ability to identify attractive acquisition opportunities; and
• Our ability to successfully integrate acquisitions.
Recent Developments
Leadership Transition
In October 2022, Graham A. Purdy, the Company's former Chief Operating Officer,
was appointed as President and Chief Executive Officer of the Company and as a
member of the Board upon the resignation of Yavor Efremov as the Company's
president and CEO and a member of the Board of Directors. In connection with Mr.
Efremov's termination of employment he is eligible to receive severance benefits
as set forth in his employment agreement. We expect to take a charge of
approximately $2.2 million in the fourth quarter 2022 for the severance
benefits.
In connection with Mr. Purdy's appointment and Mr. Efremov's departure, David
Glazek, current non-executive Chair of the Board, will transition to the role of
Executive Chair effective January 2023. Mr. Purdy will be the Company's
principal executive officer. The Company expects to appoint a lead independent
director at the time Mr. Glazek becomes the Company's Executive Chair.
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Non-Tobacco Nicotine Included Under Jurisdiction of FDA's Center for Tobacco
Products
New legislation enacted on March 15, 2022, provides authority for the FDA to
regulate tobacco products containing nicotine from any source ("NTN Products").
This law took effect April 14, 2022, and requires NTN Products to comply with
applicable requirements under the Federal Food, Drug, and Cosmetic Act, such as
not selling to persons under 21 years of age, not marketing these products as
modified risk tobacco products without FDA's authorization, and not distributing
free samples. Additionally, companies with NTN Products in the market between
March 15, 2022, and April 14, 2022, were required to file a premarket tobacco
application by May 14, 2022. NTN Products subject of a timely-filed PMTA, and
not in receipt of a negative action, were allowed to remain on the market until
July 13, 2022, at which time these products became subject to enforcement,
similar to tobacco-derived products remaining under review. We submitted
premarket filings for certain of our NTN Products prior to the May 14, 2022,
deadline. While these applications remain under review, we will continue to
supplement these filings with additional information to support a finding that
the marketing of these products is "appropriate for the protection of public
health."
CLIPPER® Lighters
In February 2022, we entered into an agreement with Flamagas, a renowned lighter
manufacturer, for exclusive distribution of CLIPPER® lighters in the United
States and Canada.
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. We have received certain shipping exemptions from
carrier services to carry the affected freight and have created a supplemental
logistical network for those shipments not covered by the exemptions.
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 2021 Annual
Report on Form 10-K.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that impact the Company.
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Results of Operations
Comparison of the Three Months Ended September 30, 2022, to the Three Months
Ended September 30, 2021
The table and discussion set forth below displays our consolidated results of
operations (in thousands):
Three Months Ended September 30,
2022 2021 % Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products $ 52,061 $ 42,234 23.3 %
Stoker's products 33,525 30,472 10.0 %
NewGen products 22,216 37,198 -40.3 %
Total net sales 107,802 109,904 -1.9 %
Cost of sales 55,090 55,635 -1.0 %
Gross profit
Zig-Zag products 28,035 23,703 18.3 %
Stoker's products 18,279 17,104 6.9 %
NewGen products 6,398 13,462 -52.5 %
Total gross profit 52,712 54,269 -2.9 %
Selling, general, and administrative expenses 32,891 31,894 3.1 %
Operating income 19,821 22,375 -11.4 %
Interest expense, net 4,802 5,397 -11.0 %
Investment income (75 ) (157 ) -52.2 %
Gain on extinguishment of debt - (375 ) -100.0 %
Income before income taxes 15,094 17,510 -13.8 %
Income tax expense 3,797 4,073 -6.8 %
Consolidated net income 11,297 13,437 -15.9 %
Net loss attributable to non-controlling interest (239 ) (31 ) 671.0 %
Net income attributable to Turning Point Brands, Inc. $ 11,536 $ 13,468 -14.3 %
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Net Sales: For the three months ended September 30, 2022, consolidated net
sales decreased to $107.8 million from $109.9 million for the three months ended
September 30, 2021, a decrease of $2.1 million or 1.9%. The decrease in net
sales was primarily driven by decreased sales volume in the NewGen Products
segment.
For the three months ended September 30, 2022, net sales in the Zig-Zag Products
segment increased to $52.1 million from $42.2 million for the three months ended
September 30, 2021, an increase of $9.8 million or 23.3%. For the three months
ended September 30, 2022, volume increased 21.7% and price/mix increased 1.6%.
Our U.S. rolling papers business grew double-digits, primarily through our
e-commerce channels. Continued strength in paper cones, strong receptivity to
promotional programs, the launch of CLIPPER lighters, and timing shifts in
Canadian deliveries contributed to strong performance during the quarter. In
total, we believe approximately $5 million of sales were pulled forward from the
fourth quarter across the Zig Zag Products segment.
For the three months ended September 30, 2022, net sales in the Stoker's
Products segment increased to $33.5 million from $30.5 million for the three
months ended September 30, 2021, an increase of $3.1 million or 10%. For the
three months ended September 30, 2022, volume increased 2.4% and price/mix
increased 7.6%. The increase in net sales was driven by double-digit growth of
Stoker's® MST partially offset by a mid-single digit decline in loose-leaf
chewing tobacco. FRE nicotine pouch products was a marginal contributor to
segment sales.
For the three months ended September 30, 2022, net sales in the NewGen products
segment decreased to $22.2 million from $37.2 million for the three months ended
September 30, 2021, a decrease of $15.0 million or 40.3%. The decrease in net
sales was primarily the result of declines in the vape distribution businesses
which continues to be impacted by the regulatory environment. Net sales have
been relatively steady sequentially within the current year period.
Gross Profit: For the three months ended September 30, 2022, consolidated gross
profit decreased to $52.7 million from $54.3 million for the three months ended
September 30, 2021, a decrease of $1.6 million or 2.9%. Gross profit as a
percentage of revenue decreased to 48.9% for the three months ended September
30, 2022, compared to 49.4% for the three months ended September 30, 2021 driven
by mix.
For the three months ended September 30, 2022, gross profit in the Zig-Zag
Products segment increased to $28.0 million from $23.7 million for the three
months ended September 30, 2021, an increase of $4.3 million or 18.3%. Gross
profit as a percentage of net sales decreased to 53.9% of net sales for the
three months ended September 30, 2022, from 56.1% of net sales for the three
months ended September 30, 2021, as a result of strong growth in lower gross
margin products including the launch of our lighters business.
For the three months ended September 30, 2022, gross profit in the Stoker's
Products segment increased to $18.3 million from $17.1 million for the three
months ended September 30, 2021, an increase of $1.2 million or 6.9%. Gross
profit as a percentage of net sales decreased to 54.5% of net sales for the
three months ended September 30, 2022, from 56.1% of net sales for the three
months ended September 30, 2021, primarily as a result of the mix impact of FRE
and stronger growth in discount looseleaf products.
For the three months ended September 30, 2022, gross profit in the NewGen
products segment decreased to $6.4 million from $13.5 million for the three
months ended September 30, 2021, a decrease of $7.1 million or 52.5%. Gross
profit as a percentage of net sales decreased to 28.8% of net sales for the
three months ended September 30, 2022, from 36.2% of net sales for the three
months ended September 30, 2021, primarily as a result of product mix and the
competitive environment.
Selling, General, and Administrative Expenses: For the three months ended
September 30, 2022, selling, general, and administrative expenses increased to
$32.9 million from $31.9 million for the three months ended September 30, 2021,
an increase of $1.0 million or 3.1%. Selling, general and administrative
expenses in the three months ended September 30, 2022, included $1.4 million of
stock options, restricted stock and incentives expense, $1.2 million of expense
related to PMTA and $0.4 million of consulting expense related to the scoping
and mobilization of the new ERP and CRM systems. Selling, general and
administrative expenses in the three months ended September 30, 2021, included
$1.8 million of stock option, restricted stock and incentives expense, $0.2
million of transaction income and $1.0 million of expense related to PMTA.
Interest Expense, net: For the three months ended September 30, 2022, interest
expense, net decreased to $4.8 million, from $5.4 million for the three months
ended September 30, 2021 as a result of the repayment of the Promissory Note and
forgiveness of the Unsecured Loan each discussed in Note 11 Notes Payable and
Long-Term Debt in the Consolidated Financial Statements. In addition interest
income earned on our cash balance offset interest expense.
Investment Income: For the three months ended September 30, 2022, investment
income decreased to $0.1 million, compared to $0.2 million of investment income
for the three months ended September 30, 2021.
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Gain on Extinguishment of Debt There was no gain on extinguishment of debt for
the three months ended September 30, 2022 compared to $0.4 million for the three
months ended September 30, 2021 related to the repayment of the Promissory Note.
Income Tax Expense: Our income tax expense of $3.8 million was 25.2% of income
before income taxes for the three months ended September 30, 2022 and included a
discrete tax benefit of $0.0 million relating to stock option exercises. Our
effective income tax rate was 23.3% for the three months ended September 30,
2021 and included a discrete tax benefit $1.0 million relating to stock option
exercises.
Net Loss Attributable to Non-Controlling Interest: Net loss attributable to
non-controlling interest was $0.2 million for the three months ended September
30, 2022 compared to $0.0 million for the three months ended September 30, 2021.
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, 2022 and 2021, was $11.5 million and $13.5
million, respectively.
Comparison of the Nine Months Ended September 30, 2022, to the Nine Months Ended
September 30, 2021
The table and discussion set forth below displays our consolidated results of
operations (in thousands):
Nine Months Ended September 30,
2022 2021 % Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products $ 143,959 $ 130,440 10.4 %
Stoker's products 98,816 93,096 6.1 %
NewGen products 68,846 116,652 -41.0 %
Total net sales 311,621 340,188 -8.4 %
Cost of sales 155,646 172,685 -9.9 %
Gross profit
Zig-Zag products 80,808 76,342 5.8 %
Stoker's products 54,044 51,142 5.7 %
NewGen products 21,123 40,019 -47.2 %
Total gross profit 155,975 167,503 -6.9 %
Selling, general, and administrative expenses 98,779 95,900 3.0 %
Operating income 57,196 71,603 -20.1 %
Interest expense, net 15,142 15,406 -1.7 %
Investment loss (income) 6,074 (292 ) -2180.1 %
Loss on extinguishment of debt - 5,331 -100.0 %
Income before income taxes 35,980 51,158 -29.7 %
Income tax expense 8,706 11,151 -21.9 %
Consolidated net income 27,274 40,007 -31.8 %
Net loss attributable to non-controlling interest (684 ) (598 ) 14.4 %
Net income attributable to Turning Point Brands, Inc. $ 27,958 $ 40,605 -31.1 %
Net Sales: For the nine months ended September 30, 2022, consolidated net sales
decreased to $311.6 million from $340.2 million for the nine months ended
September 30, 2021, a decrease of $28.6 million or 8.4%. The decrease in net
sales was driven by decreased sales volume in the NewGen Products segment.
For the nine months ended September 30, 2022, net sales in the Zig-Zag Products
segment increased to $144.0 million from $130.4 million for the nine months
ended September 30, 2021, an increase of $13.5 million or 10.4%. For the nine
months ended September 30, 2022, volume increased 8.4% and price/mix increased
2.0%. The increase in net sales was driven by double-digit growth in U.S.
rolling papers primarily through our e-commerce channels. Continued strength in
paper cones, strong receptivity to promotional programs, the launch of CLIPPER
lighters, and timing shifts in Canadian deliveries contributed to strong
performance during the quarter. In total, we believe approximately $5 million of
sales were pulled forward from the fourth quarter across the Zig Zag Products
segment. However, these increases were offset by declines in the cigar wraps
business driven partially by a trade inventory reduction in the current period
compared with a trade inventory load in the prior year period.
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For the nine months ended September 30, 2022, net sales in the Stoker's Products
segment increased to $98.8 million from $93.1 million for the nine months ended
September 30, 2021, an increase of $5.7 million or 6.1%. For the nine months
ended September 30, 2022, volume decreased 1.4% and price/mix increased 7.5%.
The increase in net sales was driven by double digit growth of Stoker's® MST
partially offset by a mid-single digit decline in loose-leaf chewing tobacco.
FRE nicotine pouch products was a marginal contributor to segment sales.
For the nine months ended September 30, 2022, net sales in the NewGen products
segment decreased to $68.8 million from $116.7 million for the nine months ended
September 30, 2021, a decrease of $47.8 million or 41.0%. The decrease in net
sales was primarily the result of declines in the vape distribution businesses
which continue to be impacted by the regulatory environment.
Gross Profit: For the nine months ended September 30, 2022, consolidated gross
profit decreased to $156.0 million from $167.5 million for the nine months ended
September 30, 2021, a decrease of $11.5 million or 6.9%. Gross profit as a
percentage of revenue increased to 50.1% for the nine months ended September 30,
2022, compared to 49.2% for the nine months ended September 30, 2021 driven by
mix as the NewGen Products segment generates lower margins.
For the nine months ended September 30, 2022, gross profit in the Zig-Zag
Products segment increased to $80.8 million from $76.3 million for the nine
months ended September 30, 2021, an increase of $4.5 million or 5.8%. Gross
profit as a percentage of net sales decreased to 56.1% of net sales for the nine
months ended September 30, 2022, from 58.5% of net sales for the nine months
ended September 30, 2021, as a result of strong growth in lower gross margin
products including the launch of our lighters business.
For the nine months ended September 30, 2022, gross profit in the Stoker's
Products segment increased to $54.0 million from $51.1 million for the nine
months ended September 30, 2022, an increase of $2.9 million or 5.7%. Gross
profit as a percentage of net sales decreased to 54.7% of net sales for the nine
months ended September 30, 2022, from 54.9% of net sales for the nine months
ended September 30, 2021.
For the nine months ended September 30, 2022, gross profit in the NewGen
products segment decreased to $21.1 million from $40.0 million for the nine
months ended September 30, 2021, a decrease of $19.0 million or 47.2%. Gross
profit as a percentage of net sales decreased to 30.7% of net sales for the nine
months ended September 30, 2022, from 34.3% of net sales for the nine months
ended September 30, 2021, as a result of product mix and the competitive
environment.
Selling, General, and Administrative Expenses: For the nine months ended
September 30, 2022, selling, general, and administrative expenses increased to
$98.8 million from $95.9 million for the nine months ended September 30, 2021,
an increase of $2.9 million or 3.0%. Selling, general and administrative
expenses for the nine months ended September 30, 2022, included $4.1 million of
stock options, restricted stock and incentives expense, $0.8 million of
transaction expense, $4.3 million of expense related to PMTA, $1.6 million of
expense related to corporate restructuring and $1.6 million of consulting
expense related to the scoping and mobilization of the new ERP and CRM systems.
Selling, general and administrative expenses in the nine months ended September
30, 2021, included $6.0 million of stock option, restricted stock and incentives
expense (including $1.1 million for accelerated vesting of options for a
departing executive), $1.1 million of transaction costs and $1.9 million of
expense related to PMTA.
Interest Expense, net: For the nine months ended September 30, 2022, interest
expense, net decreased to $15.1 million, from $15.4 million for the nine months
ended September 30, 2021 as a result of the increase in the Company's
outstanding debt in February 2021 offset by interest earned on our cash balance.
Investment Loss (Income): For the nine months ended September 30, 2022,
investment loss increased to $6.1 million, compared to $0.3 million of
investment income for the nine months ended September 30, 2021, primarily as a
result of $6.3 million impairment of our investment in dosist. See Note 9 Other
Assets in the Consolidated Financial Statements for information on the dosist
impairment.
Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for
the nine months ended September 30, 2022 compared to $5.3 million for the nine
months ended September 30, 2021 related to the repayment of the 2018 First Lien
Credit Facility.
Income Tax Expense: Our income tax expense of $8.7 million was 24.2% of income
before income taxes for the nine months ended September 30, 2022 and included a
discrete tax benefit of $0.7 million relating to stock option exercises. Our
effective income tax rate was 21.8% for the nine months ended September 30, 2021
and included a discrete tax benefit $6.2 million relating to stock option
exercises.
Net Loss Attributable to Non-Controlling Interest: Net loss attributable to
non-controlling interest was $0.7 million for the nine months ended September
30, 2022 compared to $0.6 million for the nine months ended September 30, 2021.
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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, 2022 and 2021, was $28.0 million and $40.6
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 debt instruments contain covenants which use Adjusted EBITDA
calculations.
We define "EBITDA" as net income before interest expense, net, gain (loss) on
extinguishment of debt, provision for income taxes, depreciation, and
amortization. We define "Adjusted EBITDA" as net income before interest expense,
net, gain (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,
2022 2021
Net income attributable to Turning Point Brands, Inc. $ 11,536 $ 13,468
Add:
Interest expense, net
4,802 5,397
Gain on extinguishment of debt - (375 )
Income tax expense 3,797 4,073
Depreciation expense 861 767
Amortization expense 454 477
EBITDA $ 21,450 $ 23,807
Components of Adjusted EBITDA
Corporate restructuring (a) 17 -
ERP/CRM (b) 435 -
Stock options, restricted stock, and incentives expense (c) 1,442 1,752
Transactional expenses (d) - (232 )
FDA PMTA (e) 1,169 960
Adjusted EBITDA $ 24,513 $ 26,287
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(a) Represents costs associated with corporate restructuring, including
severance.
(b) Represents cost associated with scoping and mobilization of new ERP and CRM
systems and cost of duplicative ERP licenses.
(c) Represents non-cash stock options, restricted stock, incentives expense and
Solace performance stock units.
(d) Represents the fees incurred for transaction expenses.
(e) Represents costs associated with applications related to FDA premarket
tobacco product application ("PMTA").
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Nine Months Ended
(in thousands) September 30,
2022 2021
Net income attributable to Turning Point Brands, Inc. $ 27,958 $ 40,605
Add:
Interest expense, net
15,142 15,406
Loss on extinguishment of debt - 5,331
Income tax expense 8,706 11,151
Depreciation expense 2,611 2,313
Amortization expense 1,373 1,431
EBITDA $ 55,790 $ 76,237
Components of Adjusted EBITDA
Corporate restructuring (a) 1,619 -
ERP/CRM (b) 1,626 -
Stock options, restricted stock, and incentives expense (c) 4,103 6,015
Transactional expenses (d) 789 1,077
FDA PMTA (e) 4,265 960
Non-cash asset impairment (f) 6,300 -
Adjusted EBITDA $ 74,492 $ 84,289
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(a) Represents costs associated with corporate restructuring, including
severance.
(b) Represents cost associated with scoping and mobilization of new ERP and CRM
systems and cost of duplicative ERP licenses.
(c) Represents non-cash stock options, restricted stock, incentives expense and
Solace performance stock units.
(d) Represents the fees incurred for transaction expenses.
(e) Represents costs associated with applications related to FDA premarket
tobacco product application ("PMTA").
(f) Represents impairment of investment in dosist.
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, 2022, we had $105.7 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 $27.7 million to $108.2 million at September 30, 2022,
compared with $80.5 million at December 31, 2021 primarily due to increase in
inventory as a result of our annual tobacco purchase.
As of
(in thousands) September 30, December 31,
2022 2021
Current assets $ 150,110 $ 120,849
Current liabilities 41,881 40,336
Working capital $ 108,229 $ 80,513
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Cash Flows from Operating Activities
For the nine months ended September 30, 2022, net cash provided by operating
activities was $16.4 million compared to net cash provided by operating
activities of $49.6 million for the nine months ended September 30, 2021, a
decrease of $33.2 million, primarily due to lower net income due to decreased
sales in the NewGen Segment combined with the timing of changes to working
capital, primarily as a result of annual tobacco inventory purchase.
Cash Flows from Investing Activities
For the nine months ended September 30, 2022, net cash used in investing
activities was $17.8 million compared to net cash used in investing activities
of $52.2 million for the nine months ended September 30, 2021, a decrease of
$34.5 million, primarily due to the lower purchases of investments in our MSA
escrow account as well as no acquisitions and a small investments made in the
current year period.
Cash Flows from Financing Activities
For the nine months ended September 30, 2022, net cash used in financing
activities was $31.2 million compared to net cash provided by financing
activities of $76.3 million for the nine months ended September 30, 2021, a
decrease of $107.5 million. The decrease was primarily due to an increase in
cash used to repurchase common stock during 2022 while in 2021 the Company
received net proceeds received 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.
Dividends and Share and Repurchases
The most recent dividend of $0.06 per common share was paid on October 7, 2022,
to shareholders of record at the close of business on September 16, 2022.
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. On October 25, 2021, the Board
increased the approved share repurchase program by $30.7 million. On February
24, 2022, the Board increased the approved share repurchase program by $24.6
million. The program is subject to the ongoing discretion of the Board. The
total number of shares repurchased for the nine months ended September 30, 2022,
was 307,207 shares for a total cost of $7.6 million and an average price per
share of $24.78. $29.4 million remains available for share repurchases under the
program at September 30, 2022.
Subject to market conditions, we will from time to time opportunistically
repurchase our Senior Secured Notes and Convertible Senior Notes and any other
securities we may have outstanding.
Repurchases of common stock, Senior Secured Notes and Convertible Senior Notes
may be made through bilateral transactions, open market transactions, 10b5-1
trading plans or otherwise.
Long-Term Debt
As of September 30, 2022, we were in compliance with the financial and
restrictive covenants of the Senior Secured Notes and 2021 Revolving Credit
Facility. The following table provides the outstanding balances of our debt
instruments.
September 30, December 31,
2022 2021
Senior Secured Notes $ 250,000 $ 250,000
Convertible Senior Notes 172,500 172,500
Gross notes payable and long-term debt 422,500 422,500
Less deferred finance charges (6,471 ) (8,328 )
Notes payable and long-term debt $ 416,029 $ 414,172
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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.
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. The Indenture provides for customary
events of default. We were in compliance with all covenants as of September 30,
2022.
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.
2021 Revolving Credit Facility
In connection with the Offering, we also entered into a new $25.0 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 as of
September 30, 2022. 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.
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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 $5.0
million) in the aggregate outstanding exceeds 35% of the total commitments under
the 2021 Revolving Credit Facility. The 2021 Revolving Credit Agreement provides
for customary events of default. We were in compliance with all covenants as of
September 30, 2022.
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.
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 3,213,589 shares
of our voting common stock under certain circumstances prior to maturity at a
conversion rate of 18.630 shares per $1,000 principal amount of the Convertible
Senior Notes, which represents a conversion price of approximately $53.68 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, 2022.
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 $53.68 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.
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. 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 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 issued pursuant
to the CARES Act. The proceeds of the loan were received on April 27, 2020. The
loan was scheduled to mature on April 17, 2022 and had a 1.00% interest rate.
Under the CARES Act we were permitted to apply for forgiveness of the loan if
the proceeds were used as required for certain purposes. During 2021, we applied
for forgiveness for the loan. On October 15, 2021, we received notice that our
application for forgiveness was fully approved. The extinguishment of the
unsecured loan occurred in the fourth quarter of 2021 resulting in a $7.5
million gain on extinguishment of debt. We are subject to audit relating to the
unsecured loan until 2027 which could result in repayment of some or all of the
unsecured loan previously forgiven. However, we believe that repayment of any
amount is not probable.
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Off-balance Sheet Arrangements
During the nine months ended September 30, 2022, we executed various option
contracts, which met hedge accounting requirements for the purchase of €18.5
million with maturity dates ranging from August 2022 to March 2023. At September
30, 2022, we had option contracts for the purchase of €15.2 million
outstanding. The foreign currency contracts' fair value at September 30, 2022,
resulted in an asset of $0.2 million included in Other current assets and a
liability of $0.5 million included in Accrued liabilities. During 2021, we did
not execute any foreign currency contracts. We had no foreign currency contracts
at December 31, 2021. The Company had no interest rate swap contracts at
September 30, 2022. The Company terminated its 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
Inflation in general and the recent rapid increases in costs of goods and
services, such as food and gas prices have had a substantial negative effect on
the purchasing power of consumers. While historically, we have been able to pass
on most cost increases to our customers, no assurance can be given that we will
continue to be able to do so. 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.
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