TURNING POINT BRANDS, INC. 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 ofTurning 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 toTurning Point Brands, Inc. , and its consolidated subsidiaries. References to "TPB" refer toTurning Point Brands, Inc. , without any of its subsidiaries. We were incorporated in 2004 under the nameNorth Atlantic Holding Company, Inc. OnNovember 4, 2015 , we changed our name toTurning 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 theU.S. andCanada , and positively evolving consumer perception and acceptance inNorth America . The OTP industry, which consists of non-cigarette tobacco products, exhibited low double-digit consumer unit growth in 2020 as reported byManagement 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 theU.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. InJanuary 2019 , we establishedNu-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. InJuly 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 ofDecember 31, 2020 , our products are available in approximately 190,000U.S. retail locations which, with the addition of retail stores inCanada , 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.
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.
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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. 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;
• 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
Senior Secured Notes and 2021 Revolving Credit Facility
OnFebruary 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 onFebruary 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 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.Docklight Brands, Inc. OnApril 19, 2020 , we invested$8.7 million inDocklight 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 exclusiveU.S. distribution rights for Docklight's Marley™ CBD topical products.
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
COVID-19 may impact our results. Our third-party cigar wrap manufacturer in theDominican Republic was temporarily shut down. Our supply chain has remained operational otherwise. 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.
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.
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Critical Accounting Policies and Uses of Estimates
Inventories
Inventories are stated at the lower of cost or net realizable value. EffectiveJanuary 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.
Results of Operations
Comparison of the Three Months Ended
The table and discussion set forth below displays our consolidated results of
operations (in thousands):
Three Months Ended March 31,
2021 2020 % Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products $ 41,004 $ 28,914 41.8 %
Stoker's products 29,255 26,495 10.4 %
NewGen products 37,382 35,280 6.0 %
Total net sales 107,641 90,689 18.7 %
Cost of sales 54,380 49,258 10.4 %
Gross profit
Zig-Zag products 24,896 16,132 54.3 %
Stoker's products 15,892 13,874 14.5 %
NewGen products 12,473 11,425 9.2 %
Total gross profit 53,261 41,431 28.6 %
Selling, general, and administrative expenses 28,912 32,394 -10.7 %
Operating income 24,349 9,037 169.4 %
Interest expense, net 4,486 3,309 35.6 %
Investment income (25 ) (91 ) -72.5 %
Loss on extinguishment of debt 5,706 - NM
Net periodic income, excluding service cost - (87 ) -100.0 %
Income before income taxes 14,182 5,906 140.1 %
Income tax expense 2,654 1,407 88.6 %
Consolidated net income 11,528 4,499 156.2 %
Net loss attributable to non-controlling interest (255 ) -
Net income attributable to
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Net Sales : For the three months ended March 31, 2021 , consolidated net sales
increased to $107.6 million from $90.7 million for the three months ended March
31, 2020 , an increase of $17.0 million or 18.7%. The increase in net sales was
driven by increased sales volume across all segments, primarily in the Zig-Zag
Products segment.
For the three months ended March 31, 2021 , net sales in the Zig-Zag Products
segment increased to $41.0 million from $28.9 million for the three months ended
March 31, 2020 , an increase of $12.1 million or 41.8%. For the three months
ended March 31, 2021 , volume increased 36.9% and price/mix increased 5.0%. The
increase in net sales was primarily related to double-digit growth in US rolling
papers, MYO cigar wraps and Canadian papers.
For the three months ended March 31, 2021 , net sales in the Stoker's Products
segment increased to $29.3 million from $26.5 million for the three months ended
March 31, 2020 , an increase of $2.8 million or 10.4%. For the three months ended
March 31, 2021 , volume increased 5.1% and price/mix increased 5.3%. The increase
in net sales was driven by the continuing double-digit volume growth of
Stoker's® MST and low single-digit growth of loose-leaf chewing tobacco.
For the three months ended March 31, 2021 , net sales in the NewGen products
segment increased to $37.4 million from $35.3 million for the three months ended
March 31, 2020 , an increase of $2.1 million or 6.0%. The increase in net sales
was primarily the result of growth in both the vape distribution businesses and
Nu-X.
Gross Profit : For the three months ended March 31, 2021 , consolidated gross
profit increased to $53.3 million from $41.4 million for the three months ended
March 31, 2020 , an increase of $11.8 million or 28.6%. Gross profit as a
percentage of revenue increased to 49.5% for the three months ended March 31,
2021 , compared to 45.7% for the three months ended March 31, 2020 driven by
increased margin in the Zig-Zag Products segment as a result of the Durfort
transaction.
For the three months ended March 31, 2021 , gross profit in the Zig-Zag Products
segment increased to $24.9 million from $16.1 million for the three months ended
March 31, 2020 , an increase of $8.8 million or 54.3%. Gross profit as a
percentage of net sales increased to 60.7% of net sales for the three months
ended March 31, 2021 , from 55.8% of net sales for the three months ended March
31, 2020 , as a result of increased MYO cigar wraps sales combined with margin
increases as a result of the Durfort transaction.
For the three months ended March 31, 2021 , gross profit in the Stoker's Products
segment increased to $15.9 million from $13.9 million for the three months ended
March 31, 2020 , an increase of $2.0 million or 14.5%. Gross profit as a
percentage of net sales increased to 54.3% of net sales for the three months
ended March 31, 2021 , from 52.4% of net sales for the three months ended March
31, 2020 , primarily as a result of strong incremental margin contribution of
MST.
For the three months ended March 31, 2021 , gross profit in the NewGen products
segment increased to $12.5 million from $11.4 million for the three months ended
March 31, 2020 , an increase of $1.0 million or 9.2%. Gross profit as a
percentage of net sales increased to 33.4% of net sales for the three months
ended March 31, 2021 , from 32.4% of net sales for the three months ended March
31, 2020 .
Selling, General, and Administrative Expenses: For the three months ended March
31, 2021 , selling, general, and administrative expenses decreased to $28.9
million from $32.4 million for the three months ended March 31, 2020 , a decrease
of $3.5 million or 10.7%. Selling, general and administrative expenses in the
three months ended March 31, 2021 included $1.5 million of stock options,
restricted stock and incentives expense and $0.6 million of transaction
expenses. Selling, general and administrative expenses in the three months ended
March 31, 2020 included $0.5 million of stock option, restricted stock and
incentives expense, $1.0 million of transaction costs and $5.9 million of
expense related to PMTA, which was the primary driver for the decrease in
year-over-year selling, general, and administrative expenses.
Interest Expense, net: For the three months ended March 31, 2021 , interest
expense, net increased to $4.5 million , from $3.3 million for the three months
ended March 31, 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 March 31, 2021 , investment income
decreased to $0.0 million , from $0.1 million for the three months ended March
31, 2020 .
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Loss on Extinguishment of Debt: There was $5.7 million loss on extinguishment of
debt for the three months ended March 31, 2021 related to the repayment of the
2018 First Lien Credit Facility, compared to $0.0 million for the three months
ended March 31, 2020 .
Net Periodic Income: Net periodic income was $0.0 million for the three months
ended March 31, 2021 compared to $0.1 million for the three months ended March
31, 2020 .
Income Tax Expense: Our income tax expense of $2.7 million was 18.7% of income
before income taxes for the three months ended March 31, 2021 and included a
discrete tax benefit of $3.3 million relating to stock option exercises. Our
effective income tax rate was 23.8% for the three months ended March 31, 2020
and included a discrete tax deduction $0.7 million relating to stock option
exercises.
Net Loss Attributable to Non-Controlling Interest: Net loss attributable to
non-controlling interest was $0.3 million for the three months ended March 31,
2021 compared to $0.0 million for the three months ended March 31, 2020 .
Consolidated Net Income: Due to the factors described above, consolidated net
income for the three months ended March 31, 2021 and 2020, was $11.8 million and
$4.5 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 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.
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Three Months Ended
(in thousands) March 31,
2021 2020
Net income attributable to
$ 4,499 Add: Interest expense, net 4,486
3,309
Loss on extinguishment of debt 5,706 - Income tax expense 2,654 1,407 Depreciation expense 788 851 Amortization expense 477 425 EBITDA$ 25,894 $ 10,491 Components of Adjusted EBITDA Other (a) - (87 ) Stock options, restricted stock, and incentives expense (b) 1,498 455 Transactional expenses (c) 607 1,049 FDA PMTA (d) - 5,874 Adjusted EBITDA$ 27,999 $ 17,782
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(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 ofMarch 31, 2021 , we had$167.4 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$3.6 million to$68.6 million atMarch 31, 2021 , compared with$65.0 million atDecember 31, 2020 . The increase was primarily due to the decrease in the current portion of long-term debt. As of (in thousands) March 31, December 31, 2021 2020 Current assets$ 129,823 $ 121,638 Current liabilities 61,216 56,629 Working capital$ 68,607 $ 65,009
Cash Flows from Operating Activities
For the three months ended
Cash Flows from Investing Activities
For the three months endedMarch 31, 2021 , net cash used in investing activities was$15.8 million compared to net cash used in investing activities of$0.9 million for the three months endedMarch 31, 2020 , an increase of$14.9 million , primarily due to the purchase of investments in our MSA escrow account which reflects the change in restricted cash. 40 -------------------------------------------------------------------------------- Table of Contents Cash Flows from Financing Activities For the three months endedMarch 31, 2021 , net cash provided by financing activities was$102.1 million compared to net cash used in financing activities of$9.7 million for the three months endedMarch 31, 2020 , an increase in cash flow of$111.8 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.
Dividends and Share Repurchase
The most recent dividend of
OnFebruary 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 endedMarch 31, 2021 , was 119,031 shares for a total cost of$5.7 million and an average price per share of$48.16 .$34.1 million remains available for share repurchases under the program atMarch 31, 2021 .
Long-Term Debt
As ofMarch 31, 2021 , we were in compliance with the financial and restrictive covenants of the Senior Secured Notes and 2021 Revolving Credit Facility. The following table provides outstanding balances of our debt instruments. March 31, December 31, 2021 2020 Senior Secured Notes$ 250,000 $ - 2018 First Lien Term Loan - 130,000 Convertible Senior Notes 172,500 172,500 Note payable - Promissory Note 10,000 10,000 Note payable - Unsecured Loan 7,485 7,485 Gross notes payable and long-term debt 439,985 319,985 Less deferred finance charges (10,183 ) (5,873 ) Less current maturities (5,000 ) (12,000 )
Notes payable and long-term debt
Senior Secured Notes
OnFebruary 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 onFebruary 15, 2026 . Interest on the Senior Secured Notes is payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, commencing onAugust 15 , 2021.We used the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 FirstLien 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 toFebruary 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 toFebruary 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 toFebruary 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. 41 -------------------------------------------------------------------------------- Table of Contents 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
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 onAugust 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 ofJuly 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 endingMarch 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
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Table of Contents The 2021 Revolving Credit Agreement provides for customary events of default.
2018 Credit Facility
In the first quarter 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
InJuly 2019 we closed an offering of$172.5 million in aggregate principal amount of our 2.50% Convertible Senior Notes dueJuly 15, 2024 (the "Convertible Senior Notes"). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears onJanuary 15 andJuly 15 of each year, beginning onJanuary 15, 2020 . The Convertible Senior Notes will mature onJuly 15, 2024 , unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations. The Convertible Senior Notes are convertible into approximately 3,205,895 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.585 shares per$1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately$53.81 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 ofMarch 31, 2021 . We early adopted ASU 2020-06 effectiveJanuary 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$53.81 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 OnJune 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 payment dueSeptember 10, 2020 . The Principal Amount is 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 is subject to reduction for certain amounts payable to us as a holdback.
Unsecured Loan
OnApril 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"). OnApril 17, 2020 ,National Tobacco Company, L.P. , a wholly-owned subsidiary of the Company, entered into a loan agreement withRegions Bank guaranteed by theSmall Business Administration for a$7.5 million unsecured loan. The proceeds of the loan were received onApril 27, 2020 . The loan is scheduled to mature onApril 17, 2022 and has a 1.00% interest rate. 43 -------------------------------------------------------------------------------- Table of Contents Off-balance Sheet Arrangements During the three months endedMarch 31, 2021 , the Company did not execute any forward contracts. AtMarch 31, 2021 , the Company had forward contracts for the purchase of €13.1 million and sale of €14.3 million. The fair value of the foreign currency contracts were based on quoted market prices and resulted in an asset of$0.1 million included in Other current assets and liability of$0.0 million included in Accrued liabilities atMarch 31, 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 fromDecember 2020 toNovember 2021 . AtDecember 31, 2020 , the Company had forward contracts for the purchase of €18.0 million and sale of €19.6 million. The fair value of the foreign currency contracts are 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 atDecember 31, 2020 . The Company had interest rate swap contracts for a notional amount of$70 million atDecember 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 ofDecember 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 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
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.
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