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MarketScreener Homepage  >  Equities  >  Nyse  >  Turning Point Brands, Inc.    TPB

TURNING POINT BRANDS, INC.

(TPB)
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TURNING POINT BRANDS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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07/28/2020 | 05:29pm EDT

You should read the following discussion of the historical financial condition and results of operations in conjunction with our historical consolidated financial statements and accompanying notes, which are included elsewhere in this Quarterly Report on Form 10-Q. In addition, this discussion includes forward-looking statements subject to risks and uncertainties that may result in actual results differing from statements we make. See "Cautionary Note Regarding Forward-Looking Statements." Factors that could cause actual results to differ include those risks and uncertainties discussed in "Risk Factors."

The following discussion relates to the unaudited financial statements of Turning Point Brands, Inc., included elsewhere in this Quarterly Report on Form 10-Q. In this discussion, unless the context requires otherwise, references to "our Company" "we," "our," or "us" refer to Turning Point Brands, Inc., and its consolidated subsidiaries. References to "TPB" refer to Turning Point Brands, Inc., without any of its subsidiaries. We were incorporated in 2004 under the name North Atlantic Holding Company, Inc. On November 4, 2015, we changed our name to Turning Point Brands, Inc. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Organizational Structure

We, Turning Point Brands, Inc., are a holding company which owns North Atlantic Trading Company, Inc. ("NATC"), and its subsidiaries, Turning Point Brands, LLC ("TPLLC"), and its subsidiaries, Standard Merger Sub, LLC ("SMS"), North Atlantic Wrap Company, LLC ("NAWC"), TPB Services, LLC ("TPBS"), and Turning Point Brands (Canada) Inc. ("TPBC"). NATC includes subsidiaries National Tobacco Company, L.P. ("NTC"), National Tobacco Finance, LLC ("NTFLLC"), North Atlantic Operating Company, Inc. ("NAOC"), North Atlantic Cigarette Company, Inc. ("NACC"), and RBJ Sales, Inc. ("RBJ"). TPLLC includes subsidiaries Intrepid Brands, LLC ("Intrepid"), TPB Beast, LLC ("VaporBeast"), TPB Shark, LLC, and its subsidiaries (collectively, "Vapor Shark"), TPB International, LLC and its subsidiaries (collectively, "IVG"), Nu-X Ventures LLC ("Nu-X"), Nu-Tech Holdings LLC ("Nu-Tech"), and South Beach Holdings, LLC ("South Beach").

Overview

Turning Point Brands, Inc. (the "Company," "we," "our," or "us") is a leading, independent provider of Other Tobacco Products ("OTP") and adult consumer alternatives. We estimate the OTP industry generated approximately $11.5 billion of manufacturer revenue in 2019. In contrast to manufactured cigarettes, which have been experiencing declining volumes for decades based on data published by the Alcohol and Tobacco Tax and Trade Bureau ("TTB"), the OTP industry is demonstrating increased consumer appeal with low to mid-single digit consumer unit growth as reported by Management Science Associates, Inc. ("MSAi"), a third-party analytics and information company. We were the 6th largest competitor in terms of total OTP consumer units sold during 2019. We sell a wide range of products across the OTP spectrum; however, we do not sell cigarettes. Our portfolio of brands includes some of the most widely recognized names in the OTP industry, such as Zig-Zag®, Beech-Nut®, Stoker's®, Trophy®, VaporBeast® and VaporFi®. We currently ship to approximately 900 distributors with an additional 100 secondary, indirect wholesalers in the U.S. that carry and sell our products. We operate in three segments: (i) Smokeless products, (ii) Smoking products, and (iii) NewGen products. Under the leadership of a senior management team with an average of 24 years of experience in the tobacco industry, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency. We have identified additional growth opportunities in the emerging alternatives market. In January 2019, we established our subsidiary, Nu-X, a new company and wholly-owned subsidiary dedicated to the development, production and sale of alternative products and acquisitions in related spaces. The creation of Nu-X allows TPB to leverage its expertise in traditional OTP management to alternative products. The TPB management team has over 100 years of experience navigating federal, state and local regulations that are directly applicable to the growing alternatives market. In July 2019, we acquired the assets of Solace Technology ("Solace"). Solace is an innovative product development company which established one of the top e-liquid brands and has since grown into a leader in alternative products. Solace's legacy and innovation will enhance Nu-X's strong and nimble development engine. In July 2019, we acquired a 30% stake in ReCreation Marketing ("ReCreation). ReCreation is a specialty marketing and distribution firm focused on building brands in the Canadian smoking, vaping and alternative products categories. The investment will leverage ReCreation's significant expertise in marketing and distributing tobacco and cannabis products throughout Canada. The investment is part of Nu-X and we plan to make additional investments, partnerships and acquisitions to drive the business of Nu-X. These endeavors will enable us to continue to identify unmet customer needs and provide quality products that we believe will result in genuine customer satisfaction and foster the growth of revenue.


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Table of Contents We believe there are meaningful opportunities to grow our business organically and through acquisitions and joint ventures across all product categories. As of December 31, 2019, our products are available in approximately 185,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 210,000 points of distribution. Our sales team targets widespread distribution to all traditional retail channels, including convenience stores.

Products

We operate in three segments: Smokeless products, Smoking products and NewGen products. In our Smokeless products segment, we (i) manufacture and market moist snuff and (ii) contract for and market loose leaf chewing tobacco products. In our Smoking products segment, we principally (i) market and distribute cigarette papers, tubes, and related products; and (ii) contract for, market and distribute finished cigars and MYO cigar wraps. In our NewGen products segment, we (i) market and distribute CBD, liquid vapor products and certain other products without tobacco and/or nicotine; (ii) distribute a wide assortment of products to non-traditional retail via VaporBeast; and (iii) market and distribute a wide assortment of products to individual consumers via the VaporFi B2C online platform. Our portfolio of brands includes some of the most widely recognized names in the OTP industry such as Stoker's® in the Smokeless segment, Zig-Zag® in the Smoking segment, and VaporBeast®, VaporFi® and Solace© in the NewGen segment.

Operations

Our core tobacco business (Smokeless and Smoking segments) primarily generates revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations. Our acquisition of VaporBeast in 2016 expanded our revenue streams as we began selling directly to non-traditional retail outlets. Our acquisition of IVG in 2018 enhanced our business-to-consumer revenue stream with the addition of the Vapor-Fi online platform. Our net sales, which include federal excise taxes, consist of gross sales net of cash discounts, returns, and selling and marketing allowances.

We rely on long-standing relationships with high-quality, established manufacturers to provide the majority of our produced products. More than 80% of our production, as measured by net sales, is outsourced to suppliers. The remaining production consists of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky and the proprietary e-liquids operations located in Louisville, Kentucky. Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products which we produce in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of salaried personnel. Our other principal expenses include interest expense and other expenses.

Key Factors Affecting Our Results of Operations

We consider the following to be the key factors affecting our results of operations:

? Our ability to further penetrate markets with our existing products;

? Our ability to introduce new products and product lines that complement our

core business;

? Decreasing interest in some tobacco products among consumers;

? Price sensitivity in our end-markets;

? Marketing and promotional initiatives, which cause variability in our results;

? General economic conditions, including consumer access to disposable income;

? Cost and increasing regulation of promotional and advertising activities;

? Cost of complying with regulation, including the "deeming regulations";

? Counterfeit and other illegal products in our end-markets;

? Currency fluctuations;

? Our ability to identify attractive acquisition opportunities in OTP; and

? Our ability to integrate acquisitions.




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  Table of Contents
Recent Developments

Durfort Holdings

In June 2020, we purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. ("Durfort") and Blunt Wrap USA for $47.8 million in total consideration, comprised of $37.8 million in cash, including $1.8 million of capitalized transaction costs, and a $10.0 million Promissory Note. With this transaction, we acquired co-ownership in the intellectual property rights of all of Durfort's and Blunt Wrap USA's HTL cigar wraps and cones. We also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA which is expected to be effective within 120 days of the closing. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones.

COVID-19 Impact

As a result of the extraordinary situation we are facing, our focus is on the safety and well-being of our colleagues and the communities and customers we serve. As an organization, we have implemented several changes to enhance safety and mitigate health risk in our work environment. For our warehouse and manufacturing operations, these include split shifts, temperature scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization. These changes resulted in higher operational costs related to maintaining a safer work environment and fulfilling orders.

We canceled all unnecessary travel and facilitated telecommuting where possible. Like many companies, we have changed the way we communicate through increased use of videoconferencing and have implemented tele-selling initiatives through our sales force. Some of these changes that are proving to be efficient are likely to remain in-place even after this crisis and lead to on-going cost savings. We have also put a hold on new spending commitments as we cautiously manage through this environment.

We hired additional employees in our Louisville facility and implemented temporary wage increases for our hourly employees to meet increased demand. We shifted production capacity to manufacture hand sanitizers and have donated bottles to hospitals, nursing homes and first responders in our local communities.

COVID-19 may impact our results. Our third-party cigar wrap manufacturer in the Dominican Republic was temporarily shut down. Our supply chain has remained operational otherwise. In-person selling has been dramatically dampened, which may affect new product launches. Select budgeted annual price increases will be delayed. Our B2C platforms have seen elevated sales levels from consumer shifts to online purchasing and we gained market share. We continue to monitor this challenging environment closely and will make necessary adjustments as needed to make sure we are serving our employees and customers, while also protecting the safety of employees and communities.


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  Table of Contents
Standard Diversified Inc. ("SDI") Reorganization

On July 16, 2020, we completed our merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of TPB in a tax-free downstream merger. Under the terms of the agreement, the holders of SDI's Class A Common Stock and SDI's Class B Common Stock (collectively, "SDI Common Stock") received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock ("TPB Common Stock") at a ratio of 0.52095 shares of TPB Common Stock for each share SDI Common Stock. SDI divested its assets prior to close such that the net liabilities at closing did not exceed $25,000 (whole dollars) and the only assets that it retained was the remaining TPB Common Stock holdings. We no longer have a controlling shareholder and 245,234 shares of TPB Common Stock were retired. The transaction significantly improved the public float of shares outstanding and eliminated the overhang of a controlling holding company structure.

Premarket Tobacco Application Deadline Extension

The United States District Court for the District of Maryland agreed to an FDA request filed for a 120-day extension of the premarket tobacco application deadline for many e-cigarettes, cigars and other tobacco products. FDA stated that the extension was needed because of the impacts of the coronavirus on both the agency and the industry. The Court-modified Remedy Order had the effect of moving the premarket filing deadline from May 12, 2020 to September 9, 2020. FDA subsequently issued Guidance in line with the modified Remedy Order.

Critical Accounting Policies and Uses of Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 Annual Report on Form 10-K.

Recent Accounting Pronouncements

Refer to Note 2, "Summary of Significant Accounting Policies", of Notes to Consolidated Financial Statements included in this Quarterly Report for a description of recently issued accounting pronouncements, including those recently adopted.

Results of Operations

Comparison of the Three Months Ended June 30, 2020, to the Three Months Ended June 30, 2019

The table and discussion set forth below displays our consolidated results of operations (in thousands):


                                                      Three Months Ended June 30,
                                                   2020           2019        % Change
Consolidated Results of Operations Data:
Net sales
Smokeless products                              $    30,822$ 26,176           17.7 %
Smoking products                                     27,403       25,363            8.0 %
NewGen products                                      46,738       41,800           11.8 %
Total net sales                                     104,963       93,339           12.5 %
Cost of sales                                        56,871       52,156            9.0 %
Gross profit
Smokeless products                                   16,664       14,063           18.5 %
Smoking products                                     15,671       13,738           14.1 %
NewGen products                                      15,757       13,382           17.7 %
Total gross profit                                   48,092       41,183           16.8 %

Selling, general, and administrative expenses        30,756       21,242           44.8 %
Operating income                                     17,336       19,941          -13.1 %
Interest expense, net                                 4,980        3,736           33.3 %
Investment income                                       (34 )       (118 )        -71.2 %
Loss on extinguishment of debt                            -          150
Net periodic income, excluding service cost            (104 )        (11 )        845.5 %
Income before income taxes                           12,494       16,184          -22.8 %
Income tax expense                                    3,267        2,979            9.7 %
Consolidated net income                         $     9,227$ 13,205          -30.1 %



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Table of Contents Net Sales: For the three months ended June 30, 2020, consolidated net sales increased to $105.0 million from $93.3 million for the three months ended June 30, 2019, an increase of $11.6 million or 12.5%. The increase in net sales was driven by increased volume across all segments in 2020.

For the three months ended June 30, 2020, net sales in the Smokeless products segment increased to $30.8 million from $26.2 million for the three months ended June 30, 2019, an increase of $4.6 million or 17.7%. For the three months ended June 30, 2020, volume increased 13.9% and price/mix increased 3.8%. The increase in net sales was driven by the continuing double-digit volume growth of Stoker's® MST. Sales in chewing tobacco products were up mid-single digits as compared to prior year.

For the three months ended June 30, 2020, net sales in the Smoking products segment increased to $27.4 million from $25.4 million for the three months ended June 30, 2019, an increase of $2.0 million or 8.0%. For the three months ended June 30, 2020, volume increased 7.5% and price/mix increased 0.5%. The increase in net sales is primarily related to double digit growth in US rolling papers and Canada papers, partially offset by a $2.4 million decline in MYO cigar wraps due to COVID-19 related supply disruption and a $0.4 million decline in non-focus cigars and MYO.

For the three months ended June 30, 2020, net sales in the NewGen products segment increased to $46.7 million from $41.8 million for the three months ended June 30, 2019, an increase of $4.9 million or 11.8%. The increase in net sales is the result of strong market share gains in our vape distribution business and positive contributions from Solace and other Nu-X products.

Gross Profit: For the three months ended June 30, 2020, consolidated gross profit increased to $48.1 million from $41.2 million for the three months ended June 30, 2019, an increase of $6.9 million or 16.8%. Gross profit as a percentage of revenue increased to 45.8% for the three months ended June 30, 2020, compared to 44.1% for the three months ended June 30, 2019.

For the three months ended June 30, 2020, gross profit in the Smokeless products segment increased to $16.7 million from $14.1 million for the three months ended June 30, 2019, an increase of $2.6 million or 18.5%. Gross profit as a percentage of net sales increased to 54.1% of net sales for the three months ended June 30, 2020, from 53.7% of net sales for the three months ended June 30, 2019, primarily as a as a result of strong incremental margin contribution of MST.

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Table of Contents For the three months ended June 30, 2020, gross profit in the Smoking products segment increased to $15.7 million from $13.7 million for the three months ended June 30, 2019, an increase of $1.9 million or 14.1%. Gross profit as a percentage of net sales increased to 57.2% of net sales for the three months ended June 30, 2020, from 54.2% of net sales for the three months ended June 30, 2019, as a result of increased US rolling paper sales and a continued decline in the low margin cigar business. For the three months ended June 30, 2020 non-focus cigar and MYO pipe sales declined $0.4 million as compared to the three months ended June 30, 2019.

For the three months ended June 30, 2020, gross profit in the NewGen products segment increased to $15.8 million from $13.4 million for the three months ended June 30, 2019, an increase of $2.4 million or 17.7%. Gross profit as a percentage of net sales increased to 33.7% of net sales for the three months ended June 30, 2020, from 32.0% of net sales for the three months ended June 30, 2019 primarily due to an increase in mix of proprietary products and strong growth from our higher gross margin B2C business. For the three months ended June 30, 2020, gross profit included $3.6 million of tariff expenses compared to $2.0 million for the three months ended June 30, 2019.

Selling, General, and Administrative Expenses: For the three months ended June 30, 2020, selling, general, and administrative expenses increased to $30.8 million from $21.2 million for the three months ended June 30, 2019, an increase of $9.5 million or 44.8%. Selling, general and administrative expenses in the three months ended June 30, 2020 included $0.8 million of stock options, restricted stock and incentives expense, $0.3 million of transaction expenses and $3.3 million of expense related to PMTA. Selling, general and administrative expenses in the three months ended June 30, 2019 included $1.2 million of stock option, restricted stock and incentives expense, $0.2 million of transaction costs, $0.2 million in corporate and vapor restructuring and $1.3 million of new product launch costs for Nu-X products. These costs were partially offset by a net $5.5 million gain related to the settlement of the VMR Distribution and Supply agreement during the second quarter 2019.

Interest Expense, net: For the three months ended June 30, 2020, as a result of the amortization of the debt discount on the Convertible Senior Notes of $1.8 million, interest expense, net increased to $5.0 million, from $3.7 million for the three months ended June 30, 2019.

Investment Income: Investment income relating to investment of the MSA deposits was less than $0.1 million for the three months ended June 30, 2020, compared to approximately $0.1 million for the three months ended June 30, 2019.

Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for the three months ended June 30, 2020, compared to $0.2 million for the three months ended June 30, 2019 related to the payment on the 2018 Second Lien Credit Facility.

Net Periodic Income: Net periodic income was $0.1 million for the three months ended June 30, 2020 and less than $0.1 million for the three months ended June 30, 2019.

Income Tax Expense: Our income tax expense of $3.3 million was 26.1% of income before income taxes for the three months ended June 30, 2020. Our effective income tax rate of 18.4% for the three months ended June 30, 2019 included a discrete tax deduction $0.9 million relating to stock option exercises.

Consolidated Net Income: Due to the factors described above, consolidated net income for the three months ended June 30, 2020 and 2019, was $9.2 million and $13.2 million, respectively.


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Table of Contents Comparison of the Six Months Ended June 30, 2020, to the Six Months Ended June 30, 2019

The table and discussion set forth below displays our consolidated results of operations (in thousands):


                                                      Six Months Ended June 30,
                                                  2020          2019         % Change
Consolidated Results of Operations Data:
Net sales
Smokeless products                              $  57,317$  48,720           17.6 %
Smoking products                                   56,317        50,882           10.7 %
NewGen products                                    82,018        85,365           -3.9 %
Total net sales                                   195,652       184,967            5.8 %
Cost of sales                                     106,129       103,320            2.7 %
Gross profit
Smokeless products                                 30,538        26,136           16.8 %
Smoking products                                   31,803        27,222           16.8 %
NewGen products                                    27,182        28,289           -3.9 %
Total gross profit                                 89,523        81,647            9.6 %

Selling, general, and administrative expenses      63,150        49,671           27.1 %
Operating income                                   26,373        31,976          -17.5 %
Interest expense, net                               9,974         7,592           31.4 %
Investment income                                    (125 )        (262 )        -52.3 %
Loss on extinguishment of debt                          -           150
Net periodic income, excluding service cost          (191 )         (22 )        768.2 %
Income before income taxes                         16,715        24,518          -31.8 %
Income tax expense                                  4,213         4,753          -11.4 %
Consolidated net income                         $  12,502$  19,765          -36.7 %


Net Sales: For the six months ended June 30, 2020, consolidated net sales increased to $195.7 million from $185.0 million for the six months ended June 30, 2019, an increase of $10.7 million or 5.8%. The increase in net sales was primarily driven by increased sales volume in the Smoking and Smokeless segments, partially offset by lower sales in the NewGen segment.

For the six months ended June 30, 2020, net sales in the Smokeless products segment increased to $57.3 million from $48.7 million for the six months ended June 30, 2019, an increase of $8.6 million or 17.6%. For the six months ended June 30, 2020, volume increased 15.2% and price/mix increased 2.4%. The increase in net sales was primarily driven by the continuing double-digit volume growth of Stoker's® MST.

For the six months ended June 30, 2020, net sales in the Smoking products segment increased to $56.3 million from $50.9 million for the six months ended June 30, 2019, an increase of $5.4 million or 10.7%. For the six months ended June 30, 2020, volume increased 9.2% and price/mix increased 1.5%. The increase in net sales is primarily related to double digit growth in US and Canada papers, partially offset by a $0.9 million decline in non-focus cigars and MYO pipe.

For the six months ended June 30, 2020, net sales in the NewGen products segment decreased to $82.0 million from $85.4 million for the six months ended June 30, 2019, a decrease of $3.3 million or 3.9%. The decrease in net sales is primarily the result of the discontinuance of V2 at the end of the second quarter 2019.

Gross Profit: For the six months ended June 30, 2020, consolidated gross profit increased to $89.5 million from $81.6 million for the six months ended June 30, 2019, an increase of $7.9 million or 9.6%. Gross profit as a percentage of revenue increased to 45.8% for the six months ended June 30, 2020, compared to 44.1% for the six months ended June 30, 2019.

For the six months ended June 30, 2020, gross profit in the Smokeless products segment increased to $30.5 million from $26.1 million for the six months ended June 30, 2019, an increase of $4.4 million or 16.8%. Gross profit as a percentage of net sales decreased to 53.3% of net sales for the six months ended June 30, 2020, from 53.6% of net sales for the six months ended June 30, 2019, primarily as a result of strong incremental margin contribution of MST.

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Table of Contents For the six months ended June 30, 2020, gross profit in the Smoking products segment increased to $31.8 million from $27.2 million for the six months ended June 30, 2019, an increase of $4.6 million or 16.8%. Gross profit as a percentage of net sales increased to 56.5% of net sales for the six months ended June 30, 2020, from 53.5% of net sales for the six months ended June 30, 2019, as a result of increased US and Canada paper sales and a continued decline in the low margin cigar business. For the six months ended June 30, 2020 non-focus cigar and MYO pipe sales declined $0.9 million as compared to the six months ended June 30, 2019.

For the six months ended June 30, 2020, gross profit in the NewGen products segment decreased to $27.2 million from $28.3 million for the six months ended June 30, 2019, a decrease of $1.1 million or 3.9%. Gross profit as a percentage of net sales remained flat at 33.1% of net sales for the six months ended June 30, 2020 and June 30, 2019. For the six months ended June 30, 2020, gross profit included $6.4 million of tariff expenses compared to $4.0 million for the six months ended June 30, 2019.

Selling, General, and Administrative Expenses: For the six months ended June 30, 2020, selling, general, and administrative expenses increased to $63.2 million from $49.7 million for the six months ended June 30, 2019, an increase of $13.5 million or 27.1%. Selling, general and administrative expenses in the six months ended June 30, 2020 included $1.2 million of stock options, restricted stock and incentives expense, $1.3 million of transaction expenses and $9.2 million of expense related to PMTA. Selling, general and administrative expenses in the six months ended June 30, 2019 included $1.9 million of stock option, restricted stock and incentives expense, $1.1 million of transaction costs, $1.2 million in corporate and vapor restructuring and $1.7 million of new product launch costs for Nu-X products. These costs were partially offset by a net $5.5 million gain related to the settlement of the VMR Distribution and Supply agreement during the second quarter 2019.

Interest Expense, net: For the six months ended June 30, 2020, as a result of the amortization of the debt discount on the Convertible Senior Notes of $3.5 million, interest expense, net increased to $10.0 million, from $7.6 million for the six months ended June 30, 2019.

Investment Income: Investment income relating to investment of the MSA deposits was $0.1 million for the six months ended June 30, 2020, compared to $0.3 million for the six months ended June 30, 2019.

Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for the six months ended June 30, 2020, compared to $0.2 million for the six months ended June 30, 2019 related to the payment on the 2018 Second Lien Credit Facility.

Net Periodic Income: Net periodic income was $0.2 million for the six months ended June 30, 2020 and less than $0.1 million for the six months ended June 30, 2019.

Income Tax Expense: Our income tax expense of $4.2 million was 25.2% of income before income taxes for the six months ended June 30, 2020 and included a discrete tax deduction of $3.7 million relating to stock option exercises. Our effective income tax rate of 19.4% for the six months ended June 30, 2019 included a discrete tax deduction of $4.5 million relating to stock option exercises.

Consolidated Net Income: Due to the factors described above, consolidated net income for the six months ended June 30, 2020 and 2019, was $12.5 million and $19.8 million, respectively.

EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance. In addition, our credit agreements contain financial covenants which use Adjusted EBITDA calculations.

We define "EBITDA" as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define "Adjusted EBITDA" as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of ongoing operating performance.

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Table of Contents 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.

© Edgar Online, source Glimpses


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