UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2023
or
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______________ to _______________
Commission file number: 001-37763
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of Incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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(502 ) 778-4421
(Registrant’s telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report: not applicable
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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☐
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☑
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Non-accelerated filer
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☐
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
At November 1, 2023, there were 17,604,527
shares outstanding of the registrant’s voting common stock, par value $0.01 per share.
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Page No.
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PART I—FINANCIAL INFORMATION
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ITEM 1
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Financial Statements (Unaudited)
|
||
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5
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|||
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6
|
|||
| Consolidated Statements of Income for the nine months ended September 30, 2023 and 2022 | 7 |
||
|
8
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|||
| Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2023 and 2022 |
8 |
||
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9
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|||
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10
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| 11 |
|||
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12
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ITEM 2
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37
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||
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ITEM 3
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49 | ||
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ITEM 4
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49 | ||
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PART II—OTHER INFORMATION
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ITEM 1
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50 |
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ITEM 1A
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50 |
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ITEM 2
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50 | ||
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ITEM 3
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50 | ||
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ITEM 4
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50 | ||
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ITEM 5
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51 | ||
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ITEM 6
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52 |
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| 53 |
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws.
Forward-looking statements may generally be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” and “will” or, in each case, their negative, or other variations or comparable terminology. These
forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that may or may not occur in the
future. As a result, actual events may differ materially from those expressed in, or suggested by, the forward-looking statements. Any forward-looking statement made by Turning Point Brands, Inc. (“TPB”), in this Quarterly Report on Form 10-Q
speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for TPB to predict these events or how they may affect it. TPB has no obligation, and does not intend, to update any forward-looking
statements after the date hereof, except as required by federal securities laws. Factors that could cause these differences include, but are not limited to:
| ● |
declining sales of tobacco products, and expected continuing decline of sales in the tobacco industry overall;
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| ● |
our dependence on a small number of third-party suppliers and producers;
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| ● |
the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption, as
well as other supply chain concerns, including delays in product shipments and increases in freight cost;
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| ● |
the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;
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| ● |
failure to maintain consumer brand recognition and loyalty of our customers;
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| ● |
our reliance on relationships with several large retailers and national chains for distribution of our products;
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| ● |
intense competition and our ability to compete effectively;
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| ● |
competition from illicit sources and the damage caused by illicit products to brand equity;
|
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●
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contamination of our tobacco supply or products;
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| ● |
uncertainty and continued evolution of the markets for our Creative Distribution Solutions products;
|
| ● |
complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;
|
| ● |
substantial and increasing U.S. regulation;
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| ● |
regulation or marketing denials of our products by the U.S. Food and Drug Administration, which has broad regulatory powers;
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| ● |
many of our products contain nicotine, which is considered to be a highly addictive substance;
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| ● |
requirement to maintain compliance with master settlement agreement escrow account;
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| ● |
possible significant increases in federal, state and local municipal tobacco- and vapor-related taxes;
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| ● |
our products are subject to developing and unpredictable regulation, such as court actions that impact obligations;
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| ● |
an increase in state and local regulation of our Creative Distribution Solutions products has been proposed or enacted;
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| ● |
an increase in tax of our Creative Distribution Solutions products could adversely affect our business;
|
| ● |
sensitivity of end-customers to increased sales taxes and economic conditions including significant increases in the rate of inflation and other
declines in purchasing power;
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| ● |
uncertainty surrounding FDA compliance policy;
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| ● |
possible increasing international control and regulation;
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| ● |
failure to comply with environmental, health and safety regulations;
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| ● |
imposition of significant tariffs on imports into the U.S.;
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| ● |
the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;
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| ● |
significant product liability litigation;
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| ● |
our amount of indebtedness;
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| ● |
the terms of our indebtedness, which may restrict our current and future operations;
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●
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our ability to comply with required disclosure requirements;
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| ● |
identification of material weaknesses in our internal control over financial reporting, which, if not remediated appropriately or timely, could
result in loss of investor confidence and adversely impact our stock price;
|
| ● |
our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger
proposals, which may adversely affect the market price of our common stock;
|
| ● |
our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These
restrictions may affect the liquidity of our common stock and may result in Restricted Investors (as defined in our Certificate of Incorporation) being required to sell or redeem their shares at a loss or relinquish their voting, dividend
and distribution rights;
|
| ● |
future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity
or convertible securities may dilute your ownership in us;
|
| ● |
we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;
|
| ● |
our business may be damaged by events outside of our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or
natural disasters;
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| ● |
adverse impact of climate change;
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| ● |
our reliance on information technology;
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| ● |
cybersecurity and privacy breaches;
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| ● |
failure to manage our growth;
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| ● |
failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;
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| ● |
fluctuations in our results;
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| ● |
exchange rate fluctuations;
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| ● |
adverse U.S. and global economic conditions;
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| ● |
departure of key management personnel or our inability to attract and retain talent;
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| ● |
infringement on or misappropriation of our intellectual property;
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| ● |
third-party claims that we infringe on their intellectual property; and
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| ● |
failure to meet expectations relating to environmental, social and
governance factors.
|
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
Turning Point Brands, Inc.
(dollars in thousands except share data)
|
(unaudited)
|
||||||||
| September 30, | December 31, | |||||||
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ASSETS
|
2023
|
2022
|
||||||
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Current assets:
|
||||||||
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Cash
|
$
|
|
$
|
|
||||
|
Accounts receivable, net of allowances of $
|
|
|
||||||
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Inventories, net
|
|
|
||||||
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Other current assets
|
|
|
||||||
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Total current assets
|
|
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||||||
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Property, plant, and equipment, net
|
|
|
||||||
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Deferred income taxes
|
|
|
||||||
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Right of use assets
|
|
|
||||||
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Deferred financing costs, net
|
|
|
||||||
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Goodwill
|
|
|
||||||
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Other intangible assets, net
|
|
|
||||||
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Master Settlement Agreement (MSA) escrow deposits
|
|
|
||||||
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Other assets
|
|
|
||||||
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Total assets
|
$
|
|
$
|
|
||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
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Accounts payable
|
$
|
|
$
|
|
||||
|
Accrued liabilities
|
|
|
||||||
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Current portion of long-term debt
|
||||||||
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Other current liabilities
|
|
|
||||||
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Total current liabilities
|
|
|
||||||
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Notes payable and long-term debt
|
|
|
||||||
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Lease liabilities
|
|
|
||||||
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Total liabilities
|
|
|
||||||
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Commitments and contingencies
|
||||||||
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Stockholders’ equity:
|
||||||||
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Preferred stock; $
|
|
|
||||||
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Common stock, voting, $
|
|
|
||||||
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Common stock, nonvoting, $
|
|
|
||||||
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Additional paid-in capital
|
|
|
||||||
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Cost of repurchased common stock (
|
(
|
)
|
(
|
)
|
||||
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Accumulated other comprehensive loss
|
(
|
)
|
(
|
)
|
||||
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Accumulated earnings
|
|
|
||||||
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Non-controlling interest
|
|
|
||||||
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Total stockholders’ equity
|
|
|
||||||
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Total liabilities and stockholders’ equity
|
$
|
|
$
|
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
(dollars in thousands except share data)
(unaudited)
|
Three Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Net sales
|
$
|
|
$
|
|
||||
|
Cost of sales
|
|
|
||||||
|
Gross profit
|
|
|
||||||
|
Selling, general, and administrative expenses
|
|
|
||||||
|
Operating income
|
|
|
||||||
|
Interest expense, net
|
|
|
||||||
|
Investment loss (gain)
|
|
(
|
)
|
|||||
|
Gain on extinguishment of debt
|
( |
) | ||||||
|
Income before income taxes
|
|
|
||||||
|
Income tax expense
|
|
|
||||||
|
Consolidated net income
|
|
|
||||||
|
Net gain (loss) attributable to non-controlling interest
|
|
(
|
)
|
|||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
|
Basic income per common share:
|
||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
|
Diluted income per common share:
|
||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
|
Weighted average common shares outstanding:
|
||||||||
|
Basic
|
|
|
||||||
|
Diluted
|
|
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
(dollars in thousands except share data)
(unaudited)
|
Nine
Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Net sales
|
$
|
|
$
|
|
||||
|
Cost of sales
|
|
|
||||||
|
Gross profit
|
|
|
||||||
|
Selling, general, and administrative expenses
|
|
|
||||||
|
Operating income
|
|
|
||||||
|
Interest expense, net
|
|
|
||||||
|
Investment loss
|
|
|
||||||
|
Gain on extinguishment of debt
|
(
|
)
|
|
|||||
|
Income before income taxes
|
|
|
||||||
|
Income tax expense
|
|
|
||||||
|
Consolidated net income
|
|
|
||||||
|
Net loss attributable to non-controlling interest
|
(
|
)
|
(
|
)
|
||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
|
Basic income per common share:
|
||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
|
Diluted income per common share:
|
||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
|
Weighted average common shares outstanding:
|
||||||||
|
Basic
|
|
|
||||||
|
Diluted
|
|
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
(dollars in thousands)
(unaudited)
|
Three Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Consolidated net income
|
$
|
|
$
|
|
||||
|
Other comprehensive income (loss), net of tax
|
||||||||
|
Unrealized loss on MSA investments, net of tax of $
|
(
|
)
|
(
|
)
|
||||
|
Foreign currency translation, net
of tax of $
|
|
(
|
)
|
|||||
|
Unrealized loss on derivative instruments, net of tax of $
|
(
|
)
|
(
|
)
|
||||
|
(
|
)
|
(
|
)
|
|||||
|
Consolidated comprehensive income
|
|
|
||||||
|
Comprehensive gain (loss) attributable to non-controlling interest
|
|
(
|
)
|
|||||
|
Comprehensive income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
|
Nine
Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Consolidated net income
|
$
|
|
$
|
|
||||
|
Other comprehensive income (loss), net of tax
|
||||||||
|
Unrealized loss on MSA
investments, net of tax of $
|
(
|
)
|
(
|
)
|
||||
|
Foreign currency translation, net
of tax of $
|
|
(
|
)
|
|||||
|
Unrealized loss on
derivative instruments, net of tax of $
|
(
|
)
|
(
|
)
|
||||
|
(
|
)
|
(
|
)
|
|||||
|
Consolidated comprehensive income
|
|
|
||||||
|
Comprehensive loss attributable to non-controlling interest
|
(
|
)
|
(
|
)
|
||||
|
Comprehensive income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
(dollars in thousands)
(unaudited)
|
Nine
Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Consolidated net income
|
$
|
|
$
|
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Gain on extinguishment of debt
|
(
|
)
|
|
|||||
|
Loss (gain) on sale of property, plant, and equipment
|
|
(
|
)
|
|||||
|
Depreciation and other amortization expense
|
|
|
||||||
|
Amortization of other intangible assets
|
|
|
||||||
|
Amortization of deferred financing costs
|
|
|
||||||
|
Deferred income tax expense (benefit)
|
|
(
|
)
|
|||||
|
Stock compensation expense
|
|
|
||||||
|
Noncash lease income
|
(
|
)
|
|
|||||
|
Loss on investments
|
|
|
||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
(
|
)
|
(
|
)
|
||||
|
Inventories
|
|
(
|
)
|
|||||
|
Other current assets
|
(
|
)
|
|
|||||
|
Other assets
|
(
|
)
|
|
|||||
|
Accounts payable
|
|
|
||||||
|
Accrued liabilities and other
|
(
|
)
|
(
|
)
|
||||
|
Net cash provided by operating activities
|
$
|
|
$
|
|
||||
|
Cash flows from investing activities:
|
||||||||
|
Capital expenditures
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Payments for investments
|
( |
) | ( |
) | ||||
|
Restricted cash, MSA escrow deposits
|
|
|
|
(
|
)
|
|||
|
Proceeds on the sale of property, plant and equipment
|
|
|
||||||
|
Net cash used in investing activities
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Cash flows from financing activities:
|
||||||||
|
Convertible Senior Notes repurchased
|
$ | ( |
) | $ | ||||
|
Proceeds from call options
|
||||||||
|
Payment of dividends
|
(
|
)
|
(
|
)
|
||||
|
Exercise of options
|
|
|
||||||
|
Redemption of options
|
( |
) | ( |
) | ||||
|
Redemption of performance restricted stock units
|
( |
) | ( |
) | ||||
|
Common stock repurchased
|
|
(
|
)
|
|||||
|
Net cash used in financing activities
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Net decrease in cash
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Effect of foreign currency translation on cash
|
$
|
|
$
|
(
|
)
|
|||
|
Cash, beginning of period:
|
||||||||
|
Unrestricted
|
$ |
|
$ |
|
||||
|
Restricted
|
|
|
||||||
|
Total cash at beginning of period
|
$ |
|
$ |
|
||||
|
Cash, end of period:
|
||||||||
|
Unrestricted
|
$ |
|
$ |
|
||||
|
Restricted
|
|
|
||||||
|
Total cash at end of period
|
$
|
|
$
|
|
||||
|
Supplemental schedule of noncash investing activities:
|
||||||||
|
Accrued capital expenditures
|
$
|
|
$
|
|
||||
|
Accrued consideration for acquisition of investments
|
$ |
$ |
||||||
|
Supplemental schedule of noncash financing activities:
|
||||||||
|
Dividends declared not paid
|
$
|
|
$
|
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
(dollars in thousands except share data)
(unaudited)
| Cost of |
Accumulated | |||||||||||||||||||||||||||||||
| Common | Additional | Repurchased | Other | Non- | ||||||||||||||||||||||||||||
| Voting | Stock, | Paid-In | Common | Comprehensive | Accumulated | Controlling | ||||||||||||||||||||||||||
|
Shares
|
Voting
|
Capital
|
Stock
|
Income (Loss)
|
Earnings
|
Interest
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance July 1, 2023
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
|
Unrealized loss on MSA investments, net of tax of $
|
–
|
|
|
|
(
|
)
|
|
|
(
|
)
|
||||||||||||||||||||||
| Unrealized loss on derivative instruments, net of tax of $ |
– | ( |
) | ( |
) | |||||||||||||||||||||||||||
|
Foreign currency translation, net of tax of $
|
–
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Stock compensation expense
|
–
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Exercise of options
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Settlement of call options, net of tax of $
|
– | |||||||||||||||||||||||||||||||
|
Dividends
|
–
|
|
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Net income
|
–
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Ending balance September 30, 2023
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
|
Beginning balance July 1, 2022
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
|
Unrealized loss on MSA investments, net of tax of $
|
– | ( |
) | ( |
) | |||||||||||||||||||||||||||
|
Unrealized loss on derivative instruments, net of tax of $
|
– | ( |
) | ( |
) | |||||||||||||||||||||||||||
|
Foreign currency translation, net of tax of $
|
– | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
|
Stock compensation expense
|
–
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Exercise of options
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Performance restricted stock units issuance
|
||||||||||||||||||||||||||||||||
|
Cost of repurchased common stock
|
(
|
)
|
|
|
(
|
)
|
|
|
|
(
|
)
|
|||||||||||||||||||||
|
Dividends
|
–
|
|
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Net income
|
–
|
|
|
|
|
|
(
|
)
|
|
|||||||||||||||||||||||
|
Ending balance September 30, 2022
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2023 and 2022
(dollars in thousands except share data)
(unaudited)
| Accumulated | ||||||||||||||||||||||||||||||||
| Common | Additional |
Cost of |
Other | Non- | ||||||||||||||||||||||||||||
| Voting | Stock, | Paid-In | Repurchased |
Comprehensive | Accumulated | Controlling | ||||||||||||||||||||||||||
|
Shares
|
Voting
|
Capital
|
Common Stock
|
Income (Loss)
|
Earnings
|
Interest
|
Total
|
|||||||||||||||||||||||||
|
Beginning balance January 1, 2023
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
|
Unrealized gain on MSA investments, net of tax of $
|
–
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Unrealized loss on derivative instruments, net of tax of $
|
– | ( |
) | ( |
) | |||||||||||||||||||||||||||
|
Foreign currency translation, net of tax of $
|
–
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Stock compensation expense
|
–
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Exercise of options
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Redemption of options
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
|
Performance restricted stock units issuance
|
|
|||||||||||||||||||||||||||||||
|
Performance restricted stock units redeemed
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
|
Settlement of call options, net of tax of $
|
– | |||||||||||||||||||||||||||||||
|
Dividends
|
–
|
|
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Net income
|
–
|
|
|
|
|
|
(
|
)
|
|
|||||||||||||||||||||||
|
Ending balance September 30, 2023
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
|
Beginning balance January 1, 2022
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
|
Unrealized loss on MSA investments, net of tax of $
|
– | ( |
) | ( |
) | |||||||||||||||||||||||||||
|
Unrealized loss on derivative instruments, net of tax of $
|
– | ( |
) | ( |
) | |||||||||||||||||||||||||||
|
Foreign currency translation, net of tax of $
|
– | ( |
) | ( |
( |
) | ||||||||||||||||||||||||||
|
Stock compensation expense
|
–
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Exercise of options
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Redemption of options
|
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Performance restricted stock units issuance
|
( |
) | ||||||||||||||||||||||||||||||
|
Performance restricted stock units redeemed
|
( |
) | ( |
) | ||||||||||||||||||||||||||||
|
Redemption of restricted stock units
|
– | ( |
) | ( |
) | |||||||||||||||||||||||||||
|
Cost of repurchased common stock
|
(
|
)
|
|
|
(
|
)
|
|
|
|
(
|
)
|
|||||||||||||||||||||
|
Dividends
|
–
|
|
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Net income
|
–
|
|
|
|
|
|
(
|
)
|
|
|||||||||||||||||||||||
|
Ending balance September 30, 2022
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
(dollars in thousands, except where designated and per share data)
Note 1. Description of Business and Basis of Presentation
Description of Business
Turning Point Brands, Inc. and its subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and
distributor of branded consumer products. The Company sells a wide range of products to adult consumers consisting of staple products with its iconic brands Zig-Zag® and Stoker’s® and its next generation products to fulfill
evolving consumer preferences. Its segments are led by its core, proprietary brands: Zig-Zag® and CLIPPER® in the Zig-Zag Products segment and Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment. The
Company’s products are available in more than 217 ,000 retail outlets in
North America. The Company operates in three segments: (i) Zig-Zag
Products, (ii) Stoker’s Products, and (iii) Creative Distribution Solutions (formerly known as NewGen).
Basis of Presentation
The accompanying
unaudited, interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2022. In the opinion
of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented. Such
adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods.
The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2022. The accompanying interim,
consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, do not include all the disclosures required by generally accepted accounting
principles in the United States (“GAAP”) with respect to annual financial statements.
Note 2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned, and variable interest entities (“VIEs”) for
which the Company is considered the primary beneficiary. All significant intercompany transactions have been eliminated.
Revenue Recognition
The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606),
which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which time the Company’s performance obligation is
satisfied - at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in
the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes from the transaction price,
sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars or vaping products billed to customers).
The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued
liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated to be due to
wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.
A further requirement of ASC 606 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how
the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company’s management views business performance through segments that closely resemble the performance of major product lines. Thus, the
primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 16, “Segment Information”. An additional disaggregation of contract revenue by sales
channel can be found within Note 16 as well.
Shipping Costs
The Company records shipping costs incurred as a component of
selling, general, and administrative expenses. Shipping costs incurred were approximately $5.1 million and $5.8 million for the three months
ending September 30, 2023 and 2022, respectively. Shipping costs incurred were approximately $17.0 million and $17.9 million for the nine months ending September 30, 2023 and 2022, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. 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.
Fair Value
GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under GAAP are described below:
| ● |
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.
|
| ● |
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
| ● |
Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement
date.
|
Derivative Instruments
The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory
purchase commitments. The Company accounts for its forward contracts under the provisions of ASC
815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100 % of its
anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months . The
Company may also, from time to time, hedge up to 100 % of its non-inventory purchases (e.g. production equipment) in the denominated
invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in
income. Gains and losses on these forward contracts are reclassified from other comprehensive income into inventory as the related inventories are received and are transferred to net income as inventory is sold. Changes in fair value of any
contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.
Risks and Uncertainties
Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among
others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any
regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position,
results of operations, or cash flows. In a number of states, targeted flavor bans have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could
have a material adverse effect on the Company’s financial position, results of operations or cash flows. The U.S. Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate
implementation of such measures remain unclear.
The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries
allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims
assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of Creative Distribution Solutions products due to malfunctioning devices.
There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Master Settlement Agreement (MSA): Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of
Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and
maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any
appreciation but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement
against the Company. The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. As of September 30, 2023, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $27.5
million. At December 31, 2022, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $28.0 million. The Company discontinued its generic category of MYO in 2019 and its Zig-Zag branded MYO cigarette smoking tobacco
in 2017. Thus, pending a change in MSA legislation, the Company has no remaining product lines covered by the MSA and will not be required to make future escrow deposits. We expect to begin withdrawal of the funds deposited
beginning in 2024 so long as these deposits do not become subject to litigation under the MSA-related statutes.
The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and
Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until
maturity.
Fair values for the U.S. Governmental agency obligations are Level 2 in the fair value hierarchy. The following tables
show cost and estimated fair value of the assets held in the MSA account, respectively, as well as the maturities of the U.S. Governmental agency obligations held in such account for the periods indicated.
| As of September 30, 2023 | As of December 31, 2022 | |||||||||||||||||||||||
|
Gross
|
Estimated
|
Gross
|
Estimated
|
|||||||||||||||||||||
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||||||||||||||
|
Cost
|
Losses
|
Value
|
Cost
|
Losses
|
Value
|
|||||||||||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
U.S. Governmental agency obligations (unrealized position < 12 months)
|
|
|
|
|
(
|
)
|
|
|||||||||||||||||
|
U.S. Governmental agency obligations (unrealized position > 12 months)
|
|
(
|
)
|
|
|
(
|
)
|
|
||||||||||||||||
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||
|
As of
|
||||
|
September 30,
2023
|
||||
|
Less than one year
|
$
|
|
||
|
One to five years
|
|
|||
|
Five to ten years
|
|
|||
|
Greater than ten years
|
|
|||
|
Total
|
$
|
|
||
The following shows the amount of deposits by sales year for the MSA escrow account:
| |
Deposits as of
|
|||||||
|
Sales
Year
|
September 30,
2023
|
December 31,
2022
|
||||||
|
1999
|
$
|
|
$
|
|
||||
|
2000
|
|
|
||||||
|
2001
|
|
|
||||||
|
2002
|
|
|
||||||
|
2003
|
|
|
||||||
|
2004
|
|
|
||||||
|
2005
|
|
|
||||||
|
2006
|
|
|
||||||
|
2007
|
|
|
||||||
|
2008
|
|
|
||||||
|
2009
|
|
|
||||||
|
2010
|
|
|
||||||
|
2011
|
|
|
||||||
|
2012
|
|
|
||||||
|
2013
|
|
|
||||||
|
2014
|
|
|
||||||
|
2015
|
|
|
||||||
|
2016
|
|
|
||||||
|
2017
|
|
|
||||||
| Total | $ |
$ |
||||||
FDA: On June 22, 2009, the Family Smoking Prevention and
Tobacco Control Act (the “FSPTCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of four categories
of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to also regulate cigars, pipe
tobacco, e-cigarettes, vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA.
The FDA currently assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of
Agriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco
products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.
In August 2016, the FDA’s regulatory authority under the Tobacco Control Act was extended to all tobacco products not previously covered, including: (i) certain Creative Distribution Solutions products (such as
electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco and wraps); (iii) pipe tobacco; (iv) hookah products; and (v) any
other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA
has since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids.
Subsequently, on April 14, 2022, the FDA Center for Tobacco Products also obtained jurisdiction over non-tobacco nicotine products (“NTN Products”), including synthetic
nicotine. That law subjects NTN Products to the same requirements as tobacco-derived products, including not selling these products to persons under 21 years of age, not marketing these products as modified risk tobacco products without
authorization, and not distributing free samples of these products. Additionally, NTN Products became subject to premarket filing requirements. Under the new law, manufacturers were required to file a Premarket Tobacco Application (“PMTA”) by May 14, 2022, in order to continue selling products currently on the market. 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.
A
successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must
demonstrate that a new product either has the same characteristics as its predicate product or different characteristics but does not raise different questions of public health. We submitted premarket filings for certain of our regulated products
in order to continue selling these products while they remain under review. We have continued to supplement these applications with additional information and have responded to information requests from the FDA; however, there can be no guarantee
that the FDA will accept such amendments and responses or that the applications will meet the standard of “appropriate for the protection of public health” or “substantially equivalent,” as appropriate. The FDA has indicated its enforcement
priority is those applicants who have received negative action on their application, such as a Marketing Denial Order or Refuse to File notification and who continue to illegally sell those unauthorized products, as well as products for which
manufacturers failed to submit a marketing application. Despite these stated enforcement priorities, given the FDA’s limited resources we expect that for a period of time there may be a lack of enforcement, which may adversely impact our ability to
compete in the marketplace against those who continue to sell unauthorized products. There can be no guarantee that the FDA will not shift its enforcement priorities or that it will increase in ability to enforce against unauthorized products over
time.
On
October 5, 2021, the FDA finalized two rules related to the Substantial Equivalence process and the Premarket Tobacco Product Application process, respectively, which
both became effective November 4, 2021. Both final rules (collectively, the “Rules”) indicate that any new or additional requirements will not retroactively apply to currently pending PMTAs for tobacco and tobacco-derived products; however,
the information outlined in the rule remains important to the FDA’s substantive review of an application. The FDA has yet to indicate how it might apply these Rules to NTN Product filings. We believe we have products that meet the Rules and
have filed premarket filings supporting a showing of the respective required standards. However, there is no assurance that the FDA’s guidance or regulations will not change, or that the FDA will not prioritize its enforcement in a manner
that negatively affects our pending applications, or that unforeseen circumstances will not arise that prevent us from sufficiently supplementing or completing our applications or otherwise increases the amount of time and money we are
required to spend to receive all necessary marketing orders. Although we filed many premarket applications in a timely manner, no assurance can be given that the applications will ultimately be successful. This may result in the
prioritization of supplementing or completing applications for high priority SKUs in our inventory position, which could adversely impact future revenues generated by lower priority SKUs.
In addition, we currently distribute many third-party manufactured vapor products for which we are completely dependent on the manufacturer
complying with the premarket filing requirements. There can be no assurance that these third-party products will receive a marketing order or otherwise remain in compliance with relevant legal requirements. While we will take measures to pursue
regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace
third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity. Additionally, FDA has limited resources,
which may impact its ability to meaningfully enforce these provisions. This may adversely affect our ability to compete in the marketplace against those who continue to sell unauthorized products; however, regulatory uncertainty in the FDA’s
enforcement policies may likewise affect operations or sales of our proprietary products if the FDA’s policies or priorities shift.
On May 4, 2022, the FDA proposed two
tobacco product standards related to combusted tobacco products: (1) a ban on menthol as a characterizing flavor in cigarettes; and (2) a ban on all characterizing flavors (including menthol) in cigars. On June 21, 2022, the FDA also issued a
proposed product standard related to restricting the level of nicotine in traditional cigarettes. These product standards are required to go through the formal rulemaking process where we have had the opportunity to provide comments with regard to the impact such standards would have on our products. These proposed rules remain pending. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket
filings.
Prevent All Cigarette Trafficking Act (“PACT Act”):
On December 27, 2020, President
Trump signed the Further Consolidated Appropriations Act, 2021, into law. This law included an amendment to the Jenkins Act expanding the definition of “cigarette” to include “electronic nicotine delivery systems,” or ENDS, and required that the
United States Postal Service (“USPS”) promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS. USPS issued its final rule on October 21, 2021. We have received appropriate shipping exemptions
from carrier services we use to carry the affected freight. Failure to comply with the PACT Act could result in significant financial or criminal penalties. To the extent we are unable to respond to, or comply with, these new requirements, we
could lose our shipping exemptions, be subject to civil or criminal penalties, or there could be a material adverse effect on our business, results of operations and financial condition.
Note 3. Derivative Instruments
Foreign Currency
During the nine months ended September 30, 2023, the Company executed various foreign exchange contracts, which met hedge accounting requirements for the purchase of €20.1 million and the sale of €15.2
million.
At September 30, 2023, the Company had foreign currency contracts outstanding for the purchase of €17.1 million and sale of €15.2 million.
The foreign currency contracts’ fair value at September 30, 2023, resulted in an asset of $0.1 million included in Other current assets and a liability of $0.5 million included in Accrued
liabilities. At December 31, 2022, the Company had foreign currency contracts for the purchase of €18.5 million and sale of €18.5 million. The foreign currency contracts’ fair value at December 31, 2022, resulted in an asset of $1.2 million included in Other current assets and a liability of $0.0
million included in Accrued liabilities.
Note 4. Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable
judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents
Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.
Accounts Receivable
The fair value of accounts receivable approximates their carrying value due to their short-term nature.
Long-Term Debt
The Company’s Senior Secured Notes (as defined in Note 10) bear interest at a rate of 5.625 % per year. As of September 30, 2023, the fair value approximated $226.7 million, with a carrying value of $250 million. As of December 31, 2022, the fair value of the Senior Secured
Notes approximated $226.4 million, with a carrying value of $250
million.
The Convertible Senior Notes (as defined in Note 10) bear interest at a rate of 2.50 % per year, and the fair value of the Convertible Senior
Notes without the conversion feature approximated $112.4 million, with a carrying value of $118.5 million as of September 30,
2023. As of December 31, 2022, the fair value of the Convertible Senior Notes without the conversion feature approximated $139.2 million, with a carrying value of $162.5 million.
See Note 10, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.
Note 5. Inventories
The components of inventories are as follows:
| September 30, | December 31, | |||||||
| |
2023
|
2022
|
||||||
|
Raw materials and work in process
|
$
|
|
$
|
|
||||
|
Leaf tobacco
|
|
|
||||||
|
Finished goods - Zig-Zag Products
|
|
|
||||||
|
Finished goods - Stoker’s Products
|
|
|
||||||
|
Finished goods - Creative Distribution Solutions
|
|
|
||||||
|
Other
|
|
|
||||||
|
Inventories
|
$
|
|
$
|
|
||||
The inventory valuation allowance was $4.1
million and $4.5 million as of September 30, 2023, and December 31, 2022, respectively.
Note 6. Other Current Assets
Other current assets consist of:
| September 30, | December 31, | |||||||
| |
2023
|
2022
|
||||||
|
Inventory deposits
|
$
|
|
$
|
|
||||
|
Insurance deposit
|
|
|
||||||
| Prepaid taxes |
||||||||
|
Other
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
Note 7. Property, Plant, and Equipment
Property, plant, and equipment consists of:
| September 30, | December 31, | |||||||
|
2023
|
2022
|
|||||||
|
Land
|
$
|
|
$
|
|
||||
|
Buildings and improvements
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
Machinery and equipment
|
|
|
||||||
|
Furniture and fixtures
|
|
|
||||||
|
Gross property, plant and equipment
|
|
|
||||||
|
Accumulated depreciation
|
(
|
)
|
(
|
)
|
||||
|
Net property, plant and equipment
|
$
|
|
$
|
|
||||
Note 8. Other Assets
Other assets consist of:
| September 30, | December 31, | |||||||
| |
2023
|
2022
|
||||||
|
Equity investments
|
$
|
|
$
|
|
||||
| Debt security investment | ||||||||
|
Other
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
The Company records its equity investments without a readily determinable fair value, that are not accounted for under the equity method, at cost, with adjustments
for impairment and observable price changes.
In July 2021, the Company invested $8.0 million in Old Pal Holding Company LLC (“Old Pal”). In July 2022, the Company invested an additional $1.0 million in Old Pal. The Company invested in the form of a convertible note which includes additional follow-on investment rights. The accrued interest of
$0.2 million from July 2021 to July 2022 was rolled into the convertible note in July 2022 resulting in a total
investment of $9.2 million. Old Pal is a leading brand in the cannabis lifestyle space that operates a non-plant
touching licensing model. The convertible note bears an interest rate of 3.0 % per year and matures July 31, 2026.Interest
and principal not paid to date are receivable at maturity. Old Pal has the option to extend the maturity date in one-year
increments. The interest rate is subject to change based on Old Pal reaching certain sales thresholds. The weighted average interest rate on the convertible note was 3.0 7.9 million based on a Monte Carlo simulation (Level 3). The Company determined that the impairment was a result of credit related factors and, as such, recorded an
allowance for credit losses of $1.4 million which is included in investment loss for the year ended December 31, 2022. In the
second quarter of 2023, based on a subsequent quantitative assessment of the fair value using a Monte Carlo simulation, the Company determined the fair value to be $7.7 million and recorded an additional allowance for credit losses of $0.3
million which is included in investment loss for the nine months ended September 30, 2023. The Company has recorded accrued interest receivable of $0.1
million and $0.1 million at September 30, 2023 and December 31, 2022, respectively, in other current assets on our Consolidated
Balance Sheets.
In April 2021, the Company invested $8.7 million in Docklight Brands, Inc., a
pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD. The Company has additional follow-on
investment rights. As part of the investment, the Company has obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products. In the first quarter of 2023, based on
Docklight’s financial results and other operating difficulties, and the decline in the revenue multiples for public companies comparable to Docklight, the Company deemed the investment in Docklight was impaired resulting in the fair value of the Company’s investment decreasing
to $3.8 million resulting in a loss of $4.9 million which was recorded for the three months ended March 31, 2023. In the second quarter of 2023, based on a significant change in Docklight’s business model, the
Company deemed its investment in Docklight fully impaired resulting in an additional loss of $3.8 million bringing the fair value of
the Company’s investment in Docklight to zero . Impairment losses for the Company’s investment in Docklight are recorded in
Investment loss on our Consolidated Statements of Income. Fair value for both periods was determined using a valuation derived from relevant revenue multiples (Level 3).
In October 2020, the Company invested $2.5 million to acquire a 20 % stake in Wild Hempettes, LLC, a
manufacturer of natural CBD cigarettes designed as the first cigarette-styled CBD pre-roll in the world. The Company has options to increase its stake to a 100 % ownership position based on certain milestones. As part of the transaction, the Wild Hempettes joint venture was spun off from Crown Distributing LLC and formed as a vehicle for the Company to be the
exclusive distributor of Hempettes™ cigarettes to U.S. bricks and mortar retailers under a profit-sharing arrangement. Effective January 2023, the Company terminated its distribution agreement. The Company accounts for its 20 % share of Wild Hempettes profit or loss using the equity method of accounting. In the third quarter of 2023, based on Wild Hempettes
financial results, the Company deemed its investment in Wild Hempettes to be other-than-temporarily impaired resulting in a $2.2 20 % stake represents a fair value of $0.3 million.
In October 2020, the Company invested $15.0
million in dosist™ (“Dosist”), a global cannabinoid company, with an option to invest an additional $15.0 million on pre-determined terms over the twelve month period ending
October 2021. The Company received a warrant exercisable for preferred shares of Dosist that would automatically be exercised upon the changing of certain federal cannabis laws in the United States, rescheduling cannabis and/or permitting the
general cultivation, distribution and possession of cannabis. In the fourth quarter 2021, based on the financial results of Dosist and the overall cannabinoid market, the Company deemed its investment was impaired resulting in the fair value
decreasing to $7.9 million. In the second quarter of 2022, based on a contemplated sale of the assets of Dosist, the Company deemed
its investment was impaired resulting in a further decrease in fair value of the investment to $1.6 million. Fair value was
determined using a valuation derived from the contemplated purchase price (Level 3). This resulted in a loss of $6.3 million which
is recorded in investment loss for the nine months ended September 30, 2022. Subsequent to the second quarter of 2022 impairment, the contemplated sale of assets did not occur and Dosist entered into a new agreement with a new buyer receiving
the assets of Dosist for the assumption of its liabilities. As such, the Company considered its $1.6 million remaining investment
to be fully impaired as of December 31, 2022.
Note 9. Accrued Liabilities
Accrued liabilities consist of:
| September 30, | December 31, | |||||||
| |
2023
|
2022
|
||||||
|
Accrued payroll and related items
|
$
|
|
$
|
|
||||
|
Customer returns and allowances
|
|
|
||||||
|
Taxes payable
|
|
|
||||||
|
Lease liabilities
|
|
|
||||||
|
Accrued interest
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
Note 10. Notes Payable and Long-Term Debt
Notes payable and long-term debt consists of the following in order of preference:
| September 30, | December 31, | |||||||
|
2023
|
2022
|
|||||||
|
Senior Secured Notes
|
$
|
|
$
|
|
||||
|
Convertible Senior Notes
|
|
|
||||||
|
Gross notes payable and long-term debt
|
|
|
||||||
|
Less deferred finance charges
|
(
|
)
|
(
|
)
|
||||
| Less current maturities |
( |
) | ||||||
|
Notes payable and long-term debt
|
$
|
|
$
|
|
||||
Senior Secured Notes
On February 11, 2021, the Company closed a private offering (the “Offering”) of $250.0 million aggregate principal amount of its 5.625 % senior secured notes due
2026 (the “Senior Secured Notes” or the “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.The Company 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.
The Company may redeem the Senior Secured Notes, in whole or in part, at any time on or after February 15, 2023, at the redemption prices (expressed
as a percentage of the principal amount to be redeemed) set forth below, plus accrued and unpaid interest, if any, on the Senior Secured Notes to be redeemed to (but not including) the applicable redemption date if redeemed during the period
indicated below:
|
On or after February 15, 2023
|
|
%
|
||
|
On or after February 15, 2024
|
|
%
|
||
|
On or after February 15, 2025 and thereafter
|
|
%
|
If the Company experiences a change of control (as defined in the Senior Secured Notes Indenture), the Company 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 Senior Secured Notes 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 Senior Secured Notes Indenture. The Senior Secured Notes Indenture provides for customary events of default. The Company was in compliance with all covenants as of September 30, 2023.
The Company 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, the Company also entered into a new $25.0
million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto and Barclays Bank PLC, as administrative agent and collateral agent (in such
capacity, the “Agent”). On May 10, 2023, the Company and certain of its subsidiaries, as guarantors, entered into an amendment (the “Amendment”) to the 2021 Revolving Credit Facility (as amended, the “Amended Revolving Credit Facility”).
The Amendment includes certain modifications to the 2021 Revolving Credit Facility relating to the replacement of the London Inter-Bank Offered Rate with a Secured Overnight Financing Rate (“SOFR”) as the interest rate benchmark under the 2021
Revolving Credit Facility and adjusts certain other provisions to reflect current documentation standards and other agreed modifications.
Letters of credit are limited to $10.0 million (and are a part of, and not in addition to, the revolving line of credit). The Company has no t drawn any borrowings under the Amended Revolving Credit Facility but does have letters of credit
of approximately $1.4 million outstanding under the facility as of September
30, 2023. The Amended Revolving Credit Facility will mature on August 11, 2025 ,
if none of the Company’s 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 Amended Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate or the
Term SOFR rate, as applicable, plus an applicable margin of 3.50
The obligations under the Amended Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and
Guarantors’ obligations under the Amended Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.
The Amended Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture.
The Amended Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the Amended 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 Amended 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 Amended Revolving Credit Facility. The Amended Revolving Credit Agreement provides for customary events of default.
The Company was in compliance with all covenants as of September 30, 2023.
The Company incurred debt issuance costs attributable to the issuance of the Amended
Revolving Credit Facility of $0.5 million which are
amortized to interest expense using the effective interest method over the expected life of the Amended Revolving Credit Facility.
On November 7, 2023, in connection with the entry by a subsidiary of the Company in a new asset-backed revolving credit facility, the Company
terminated the Amended Revolving Credit Agreement.
2023 ABL Facility
On November 7, 2023, TPB Specialty Finance, LLC, a
wholly-owned subsidiary of the Company (the “ABL Borrower”), entered into a new $75.0 million asset-backed revolving credit facility
(the “2023 ABL Facility”), with the several lenders thereunder, and Barclays Bank Plc, as administrative agent (the “Administrative Agent”) and as collateral agent (the “Collateral Agent”) and First-Citizens Bank & Trust Company as additional
collateral agent (the “Additional Collateral Agent”). Under the 2023 ABL Facility, the ABL Borrower may draw up to $75.0 million under
Revolving Credit Loans and LILO Loans. The 2023 ABL Facility includes a $40.0 million accordion feature. In connection with the 2023 ABL
Facility, Turning Point Brands contributed certain existing inventory to the ABL Borrower. The 2023 ABL Facility is secured on a first priority basis (subject to customary exceptions) by all assets of the ABL Borrower.
The 2023 ABL Facility contains customary borrowing
conditions including a borrowing base equal to the sum of (a) the lesser of (1) 85 % of the lower of (A) the market value (on a
first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) 85 % of the
cost of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (2) 85 % of the net orderly liquidation
value (“NOLV”) percentage of the lower of (1)(A) or (1)(B); plus (b) 85 % of the face value of all eligible accounts of the ABL Borrower
minus (c) the amount of all eligible reserves. The 2023 ABL Facility also includes a “last in last out” (“LILO”) borrowing base equal to the sum of (a) the lesser of: (1) 10 % of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) the cost of the sum
of eligible inventory, plus eligible in-transit inventory and (2) 10 % of the NOLV percentage of the lower of (1)(A) or (1)(B); plus (b)
10 % of the face amount of eligible account; minus (c) the amount of all eligible reserves.
Amounts borrowed under the 2023 ABL Facility are subject to
an interest rate margin per annum equal to (a) from and after the closing date until the last day of the first full fiscal quarter ended
after the closing date, (i) 1.25 % per annum, in the case base rate loans, and (ii) 2.25 % per annum, in the case of revolving credit loans that are SOFR Loans, (b)(i) 2.25 %
per annum, in the case of LILO loans that are base rate loans, and (ii) 3.25 % per annum, in the case of LILO loans that are SOFR loans,
(c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below based upon the historical excess availability for the most recent fiscal quarter ended immediately prior to the
relevant date, as calculated by the Administrative Agent.
|
Level
|
Historical Excess Availability
|
Applicable Margin
for SOFR Loans
|
Applicable Margin
for Base Rate Loans
|
|
I
|
Greater than or equal to
|
|
|
|
II
|
Less than
|
|
|
|
III
|
Less than
|
|
|
The 2023 ABL Facility also requires the Company and its
restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters on or after the closing date if excess availability shall be less than the greater of (a) 12.5 % of the line cap and (b) $9.4 million, at any time and continuing until excess availability is equal to or exceeds the greater of (i) 12.5 % of the line and (ii) $9.4 million for thirty (30 ) consecutive calendar days; provided that such $9.4
million level shall automatically increase in proportion to the amount of any increase in the aggregate revolving credit commitments thereunder in connection with any incremental facility.
The 2023 ABL Facility shall mature on the earlier of (x) November 7, 2027 and (y) the date that is 91 days prior to the maturity date of any material debt of the ABL Borrower or the Company or any of its restricted subsidiaries (subject to customary
extensions agreed by the lenders thereunder); provided that clause (y) shall not apply to the extent that on any applicable date of determination (on any date prior to the date set forth in clause (y)), (A) the sum of (x) cash that is held in
escrow for the repayment of such material debt pursuant to arrangements satisfactory to the Administrative Agent, (y) cash that is held in accounts with the Administrative Agent and/or the Additional Collateral Agent, plus (z) excess
availability, is sufficient to repay such material debt and (B) the ABL Borrower has excess availability of at least $15.0 million
after giving effect to such repayment of material debt, including any borrowings under the commitments in connection therewith.
Convertible Senior Notes
In July 2019, the Company closed an offering of $172.5
million in aggregate principal amount of its 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 are senior unsecured obligations of the
Company.
In the fourth quarter of 2022, a wholly owned subsidiary of the Company repurchased $10.0 million in aggregate principal amount of the Convertible Senior Notes on the open market resulting in a $0.9 million gain on extinguishment of debt. Subsequent principal repurchases occurred in the first, second and third quarters of 2023 for $13.9 million, $15.1 million and $15.0 million, respectively, in aggregate principal amounts resulting in gains on extinguishment of debt of $0.7 million, $0.6 million and $0.6 million, respectively. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable
securities law. As of September 30, 2023, $118.5 million aggregate principal remains outstanding and held by third parties.
The Convertible Senior Notes held by third parties are convertible into approximately 2,216,029 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of 18.6942 shares per $1,000 principal amount of the Convertible Senior Notes, which
represents a conversion price of approximately $53.49 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 Company in excess of pre-determined thresholds of $0.04 per share. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditions required to
allow the holders to convert their Convertible Senior Notes were not met as of September 30, 2023.
The Convertible Senior Notes of $118.5
million as of September 30, 2023, became current in the third quarter of 2023. As discussed above, on November 7,
2023, a wholly-owned subsidiary of the Company entered into the new 2023 ABL Facility to refinance up to $75.0 million of the Convertible Senior notes at maturity. As a result, the Company $70.0 million related to the Convertible Senior
Notes from Current portion of long-term debt to Notes payable
and long-term debt on the Company’s September 30,
2023 Balance Sheet. Based on current liquidity, free cash flow generation and availability under the 2023 ABL Facility, the Company believes it will have sufficient liquidity to address the maturity of the remaining Convertible Senior Notes.
The Company incurred debt issuance costs attributable to the Convertible Senior Notes of $5.9 million which are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes.
In connection with the Convertible Senior Notes offering, the Company entered into privately negotiated capped call transactions with certain
financial institutions. The capped call transactions have a strike price of $53.49 per and a cap price of $82.86 per share, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $20.53 million for these capped calls at the time they were entered into and charged that amount to additional paid-in capital.
Note 11. Leases
The Company’s leases consist primarily of leased property for manufacturing, warehouse, corporate offices and retail space as well as vehicle
leases. At lease inception, the Company recognizes a lease right of use asset and lease liability calculated as the present value of future minimum lease payments. In general, the Company does not recognize any
renewal periods within the lease terms as there are no significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a
straight-line basis over the lease term.
The components of lease expense consisted of the following:
|
Three Months Ended
September 30,
|
||||||||
| 2023 |
2022 |
|||||||
|
Operating lease cost
|
||||||||
|
Cost of sales
|
$
|
|
$
|
|
||||
|
Selling, general and administrative
|
||||||||
|
Variable lease cost (1)
|
||||||||
|
Short-term lease cost
|
||||||||
|
Total
|
$
|
|
$
|
|
||||
| (1) |
|
|
Three Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Financing lease cost
|
||||||||
|
Selling, general and administrative
|
$
|
|
$
|
|
||||
|
Total
|
$
|
|
$
|
|
||||
|
Nine Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Operating lease cost
|
||||||||
|
Cost of sales
|
$
|
|
$
|
|
||||
| Selling, general and administrative | ||||||||
| Variable lease cost (1) | ||||||||
| Short-term lease cost | ||||||||
| Total | $ | $ | ||||||
|
Nine Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Financing lease cost
|
||||||||
|
Selling, general and administrative
|
$
|
|
$
|
|
||||
|
Total
|
$
|
|
$
|
|
||||
| September 30, | December 31, | |||||||
|
2023
|
2022
|
|||||||
|
Assets:
|
||||||||
|
|
$
|
|
$
|
|
||||
|
Total lease assets
|
$
|
|
$
|
|
||||
|
Liabilities:
|
||||||||
|
(2)
|
$
|
|
$
|
|
||||
| (2) |
||||||||
|
|
||||||||
|
Total lease liabilities
|
$
|
|
$
|
|
||||
| (2) |
|
Note 12. Income Taxes
The Company’s effective income tax rate for the three and nine months ended September 30, 2023 was 25.7 % and 25.5 %, respectively. The Company’s effective income tax
rate for the three and nine months ended September 30, 2022 was 25.2 % and 24.2 %, respectively, which includes a discrete tax deduction of $0.0 million and
$0.7 million, respectively, relating to stock option exercises.
The Company follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount
recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that the Company did not have any uncertain tax positions requiring recognition
under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2019.
Note 13. Share Incentive Plans
On March 22, 2021, the Company’s Board of Directors adopted the Turning Point Brands, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), pursuant to which awards may be
granted to employees, non-employee directors, and consultants. In addition, the 2021 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2021 Plan, 1,290,000 shares, plus 100,052 shares
remaining available for issuance under the 2015 Equity Incentive Plan (the “2015 Plan”), of TPB Common Stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the
attainment of certain performance goals. The 2021 Plan is scheduled to terminate on March 21, 2031. The 2021 Plan is administered by the compensation committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the
vesting criteria for the awards, with such criteria to be specified in the award agreement. As of September 30, 2023, net of forfeitures, there were 276,484 Restricted Stock Units (“RSUs”), 118,519 options and 29,172 Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 965,877 shares available for grant under the 2021 Plan.
On April 28, 2016, the Board of Directors of the Company adopted the 2015 Plan, pursuant to which awards could have been granted to employees,
non-employee directors, and consultants. In addition, the 2015 Plan provided for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of TPB Common Stock were reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past
or future services or the attainment of certain performance goals. The 2015 Plan was scheduled to terminate on April 27, 2026. Upon adoption of the 2021 Plan, the 2015 Plan was terminated, and the Company determined no additional grants would be made under the 2015 Plan. However, all awards issued under the 2015 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. There are no shares available for grant under the 2015 Plan. The 2015 Plan was administrated by the Committee.
On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding
Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in
connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected.
There are no shares available for grant under the 2006 Plan.
Stock option activity for the 2006, 2015 and 2021 Plans is summarized below:
| Weighted | Weighted | |||||||||||
| Stock | Average | Average | ||||||||||
| Option | Exercise |
Grant Date
|
||||||||||
|
Shares
|
Price
|
Fair Value
|
||||||||||
|
Outstanding, December 31, 2021
|
|
$
|
|
$
|
|
|||||||
|
Granted
|
|
|
|
|||||||||
|
Exercised
|
(
|
)
|
|
|
||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Outstanding, December 31, 2022
|
|
$ |
|
$ |
|
|||||||
|
Granted
|
||||||||||||
|
Exercised
|
(
|
)
|
|
|
||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Outstanding, September 30, 2023
|
|
$
|
|
$
|
|
|||||||
Under the 2006, 2015 and 2021 Plans, the total intrinsic value of options exercised during the nine months ended September 30, 2023 and 2022, was $0.2 million, and $0.7 million,
respectively.
At September 30, 2023, under the 2006 Plan, the exercise price for the 46,824 3.83 per share, all of which are exercisable. The
weighted average of the remaining lives of the outstanding stock options with an exercise price of $3.83 is approximately .85 years. The Company estimates the expected life of these stock options is ten years from the date of grant. For the $3.83 per share options, the weighted
average fair value of options at the date of grant was determined using the Black-Scholes model with the following assumptions: a ten-year
life from grant date, a current share price and exercise price of $3.83 , a risk-free interest rate of 3.57 %, volatility of 40 %, and no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.
At September 30, 2023, under the 2015 and 2021 Plans, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the
time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until
sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff
Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise
experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.
The following table outlines the assumptions based on the number of options granted under the 2015 Plan.
|
February 10,
|
May 17,
|
March 7,
|
March 20,
|
October 24,
|
March 18,
|
February 18,
|
May 3,
|
|||||||||||||||||||||||||
|
2017
|
2017
|
2018
|
2019
|
2019
|
2020
|
2021
|
2021
|
|||||||||||||||||||||||||
|
Number of options granted
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Options outstanding at September 30, 2023
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Number exercisable at September 30, 2023
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Exercise price
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
|
Remaining lives
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Risk free interest rate
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||||||||||
|
Expected volatility
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||||||||||
|
Expected life
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Dividend yield
|
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
||||||||||||||||||
|
Fair value at grant date
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||||||
The following table outlines the assumptions based on the number of options granted under the 2021 Plan.
|
May 17,
|
March 14,
|
April 29,
|
May 12, | |||||||||||||
|
|
2021
|
2022
|
2022
|
2023 | ||||||||||||
|
Number of options granted
|
|
|||||||||||||||
|
Options outstanding at September 30, 2023
|
|
|||||||||||||||
|
Number exercisable at September 30, 2023
|
|
|||||||||||||||
|
Exercise price
|
$
|
|
$ | $ | $ | |||||||||||
|
Remaining lives
|
|
|||||||||||||||
|
Risk free interest rate
|
|
%
|
% | % | % | |||||||||||
|
Expected volatility
|
|
%
|
% | % | % | |||||||||||
|
Expected life
|
|
|||||||||||||||
|
Dividend yield
|
|
%
|
% | % | % | |||||||||||
|
Fair value at grant date
|
$
|
|
$ | $ | $ |
|||||||||||
The Company has recorded compensation expense related to the options based on the
provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of
approximately $0.2 million and $0.3
million for the three months ended September 30, 2023 and 2022, respectively. The Company recorded compensation expense related to the options of approximately $0.6 million and $0.8 million for the nine months ended September 30, 2023 and
2022, respectively. Total unrecognized compensation expense related to options at September 30, 2023, is $0.3 million, which will be
expensed over 0.94 years.
PRSUs are restricted stock units subject to both performance-based and service-based
vesting conditions. The number of shares of TPB Common Stock a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period. PRSUs will vest on the
measurement date, which is no more than 65 days after the performance
period provided the applicable service and performance conditions are satisfied. As of September 30, 2023, there are 456,922 PRSUs outstanding. The following table outlines the PRSUs granted and outstanding as of September 30, 2023.
|
March 20,
|
March 18,
|
December 28,
|
February 18,
|
March 14,
|
May 4, |
|||||||||||||||||||
|
2019
|
2020
|
2020
|
2021
|
2022
|
2023 | |||||||||||||||||||
|
Number of PRSUs granted
|
|
|
|
|
||||||||||||||||||||
|
PRSUs outstanding at September 30, 2023
|
|
|
|
|
||||||||||||||||||||
|
Fair value as of grant date
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | $ | ||||||||||||||
|
Remaining lives
|
|
|
|
|
||||||||||||||||||||
The Company recorded compensation expense related to the PRSUs of approximately $0.8 million and $0.8 million in the
consolidated statements of income for the three months ended September 30, 2023 and 2022, respectively, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately
$1.9 million and $2.4
million in the consolidated statements of income for the nine months ended September 30, 2023 and 2022, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards
at September 30, 2023, is $4.4 million which will be expensed over the service periods based on the probability of achieving the
performance condition.
The
Company has granted 228,640 RSUs which are outstanding and vest over to five years . The following table outlines the RSUs granted and
outstanding as of September 30, 2023.
|
March 14,
|
March 14,
|
April 29,
|
May 5,
|
May 5, | May 8, | |||||||||||||||||||
|
2022
|
2022
|
2022
|
2023
|
2023 | 2023 | |||||||||||||||||||
|
Number of RSUs granted
|
|
|
|
|||||||||||||||||||||
|
RSUs outstanding at September 30, 2023
|
|
|
|
|||||||||||||||||||||
|
Fair value as of grant date
|
$
|
|
$
|
|
$
|
|
$ | $ |
$ |
|||||||||||||||
|
Remaining lives
|
|
|
|
|||||||||||||||||||||
The Company has recorded compensation expense related to the RSUs based on the
provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the RSUs on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the RSUs of
approximately $0.8 million and $0.4
million for the three months ended September 30, 2023 and 2022. The Company recorded compensation expense related to the RSUs of approximately $2.2
million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively. Total unrecognized compensation expense
related to RSUs at September 30, 2023, is $3.3 million, which will be expensed over 2.44 years.
Note 14. Contingencies
On October 9, 2020, a purported stockholder of Turning Point Brands, Inc. (“TPB” or the “Company”), Paul-Emile Berteau (the “Plaintiff”), filed a complaint in the
Delaware Court of Chancery (the “Court”) relating to the merger of Standard Diversified, Inc. (“SDI”) with a TPB subsidiary (“Merger Sub”)pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB,
SDI and Merger Sub (the “Action”). The complaint purports to assert two derivative counts for breach of fiduciary duty on TPB’s behalf
and against the TPB Board of Directors and certain SDI affiliates (collectively, the “Defendants”). The third count also purports to assert a direct claim against TPB and its Board of Directors based on allegations that TPB’s Amended and Restated
Bylaws are inconsistent with TPB’s certificate of incorporation. On October 26, 2020, the TPB Board of Directors adopted Amendment No. 1 to TPB’s Amended and Restated Bylaws, which amended the challenged section of the bylaws. On June 30, 2021, the
Court granted in part and denied in part the Defendants’ motions to dismiss. Among other things, the Court dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the Plaintiff’s complaint as moot.
The
Defendants and the Company deny any wrongdoing but following a mediation in November 2022, the Defendants agreed to settle with the Plaintiff to eliminate the distraction, burden, expense, risks and potential delay of further litigation
involving the asserted claims. The parties entered into a Stipulation and Agreement of Compromise, Settlement and Release, dated and filed with the Court on June 27, 2023 (together with the exhibits thereto, the “Settlement Stipulation”). The
material terms of the proposed settlement of the Action include, among other things, that the Defendants’ insurers will pay or cause to be paid an aggregate of $5,000,000 into an escrow account (the “Settlement Payment”) in exchange for a release of all claims. Plaintiff also intends to seek an award of attorneys’ fees and expenses to
Plaintiff’s counsel of up to $1,000,000 that will be paid out of the Settlement Payment with the remaining funds paid to the Company, and an additional mootness fee to Plaintiff’s counsel of up to $400,000 in connection with the third count of the complaint. The proposed settlement is subject to, and conditioned on approval by the Court, and no
assurances can be given that such Court approval will be obtained. The impact to the Company is not expected to be material.
Other major tobacco companies are defendants in product liability claims. In a number
of these cases, the amounts of punitive and compensatory damages sought are significant and, if such a claim were brought against the Company, could have a material adverse effect on our business and results of operations. The Company is subject to
several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or batteries and may be subject to claims in the future relating to other Creative Distribution Solutions products. The Company is still evaluating these claims and the potential defenses to them and may from time to time settle some such suits in order to
eliminate distraction, burden, expense, risks and potential delay of further litigation involving the asserted claims. For example, the Company did not design or manufacture the products at issue; rather, the Company was merely the
distributor. Nonetheless, there can be no assurance that the Company will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
We have several subsidiaries engaged in making, distributing, and selling vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received
informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. While we
have received some such investigative requests with regard to the marketing of our vapor products, no regulatory bodies have taken action against us with regard to our marketing
practices. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal defenses against claims that they unfairly marketed vapor products.
We have two franchisor subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from time-to-time
responding parties to arbitration demands brought by franchisees. We recently won a dispositive motion in an arbitration brought by a former franchisee. We have one remaining former franchisee arbitration relating to claims of breach of contract and negligence allegations, among others. We believe we have good and
valid substantive defenses against these claims and intend on vigorously defending our interests in this matter.
Note 15. Income Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:
|
Three Months Ended September 30,
|
||||||||||||||||||||||||
|
2023
|
2022
|
|||||||||||||||||||||||
| Per | Per | |||||||||||||||||||||||
|
Income
|
Shares
|
Share
|
Income
|
Shares
|
Share
|
|||||||||||||||||||
|
Basic EPS:
|
||||||||||||||||||||||||
|
Numerator
|
||||||||||||||||||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||||||||||||||||||
|
Denominator
|
||||||||||||||||||||||||
|
Weighted average
|
|
$
|
|
|
$
|
|
||||||||||||||||||
|
Diluted EPS:
|
||||||||||||||||||||||||
|
Numerator
|
||||||||||||||||||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||||||||||||||||||
|
Interest expense related to Convertible Senior Notes, net of tax
|
|
|
||||||||||||||||||||||
|
Diluted net income attributable to Turning Point Brands. Inc.
|
$
|
|
$
|
|
||||||||||||||||||||
|
Denominator
|
||||||||||||||||||||||||
|
Basic weighted average
|
|
|
||||||||||||||||||||||
|
Convertible Senior Notes
|
|
|
||||||||||||||||||||||
|
Stock options and restricted stock units
|
|
|
||||||||||||||||||||||
|
|
$
|
|
|
$
|
|
|||||||||||||||||||
|
Nine
Months Ended September 30,
|
||||||||||||||||||||||||
|
2023
|
2022
|
|||||||||||||||||||||||
| Per |
Per | |||||||||||||||||||||||
|
Income
|
Shares
|
Share
|
Income
|
Shares
|
Share
|
|||||||||||||||||||
|
Basic EPS:
|
||||||||||||||||||||||||
|
Numerator
|
||||||||||||||||||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||||||||||||||||||
|
Denominator
|
||||||||||||||||||||||||
|
Weighted average
|
|
$
|
|
|
$
|
|
||||||||||||||||||
|
Diluted EPS:
|
||||||||||||||||||||||||
|
Numerator
|
||||||||||||||||||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
||||||||||||||||||||
|
Interest expense related to Convertible Senior Notes
|
|
|
||||||||||||||||||||||
|
Diluted net income attributable to Turning Point Brands. Inc.
|
$
|
|
$
|
|
||||||||||||||||||||
|
Denominator
|
||||||||||||||||||||||||
|
Basic weighted average
|
|
|
||||||||||||||||||||||
|
Convertible Senior Notes
|
|
|
||||||||||||||||||||||
|
Stock options and restricted stock units
|
|
|
||||||||||||||||||||||
|
|
$
|
|
|
$
|
|
|||||||||||||||||||
Note 16. Segment Information
In accordance
with ASC 280, Segment Reporting, the Company has three reportable segments: (1) Zig-Zag Products; (2) Stoker’s Products; and (3)
Creative Distribution Solutions. The Zig-Zag Products segment markets and distributes (a) rolling papers, tubes, and related products; and (b) finished cigars and MYO cigar wraps and (c) CLIPPER reusable lighters and other accessories. The Stoker’s
Products segment (a) manufactures and markets moist snuff and (b) contracts for and markets loose leaf chewing tobacco products. The Creative Distribution Solutions segment (a) markets and distributes liquid vapor products and certain other
products without tobacco and/or nicotine; (b) distributes a wide assortment of products to non-traditional retail outlets via VaporBeast; and (c) markets and distributes a wide assortment of products to individual consumers via the VaporFi B2C
online platform. Products in the Zig-Zag Products and Stoker’s Products segments are distributed primarily through wholesale distributors in the U.S. and Canada while products in the Creative Distribution Solutions segment are distributed primarily
through e-commerce to non-traditional retail outlets and direct to consumers in the U.S. Corporate unallocated includes the costs and assets of the Company not assigned to one of the three reportable segments such as intercompany transfers, deferred taxes, deferred financing fees, and investments in subsidiaries.
The accounting policies of these segments are the same as those of the Company. Corporate costs are not directly charged to the three reportable segments in the ordinary course of operations. The Company evaluates the performance of its segments and allocates resources to them
based on operating income.
The tables below present financial information about reported segments:
|
Three Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Net sales
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ | $ | ||||||
|
Creative Distribution Solutions
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
|
Gross profit
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ | $ | ||||||
|
Creative Distribution Solutions
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
|
Operating income (loss)
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Corporate unallocated (1)(2)
|
( |
) | ( |
) | ||||
|
Total Zig-Zag and Stoker’s products
|
$
|
|
$
|
|
||||
|
Creative Distribution Solutions
|
( |
) | ||||||
|
Total
|
$
|
|
$
|
|
||||
|
Interest expense, net
|
|
|
||||||
| Investment loss |
( |
) | ||||||
| Gain on extinguishment of debt | ( |
) | ||||||
|
Income before income taxes
|
$
|
|
$
|
|
||||
|
Capital expenditures
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ | $ | ||||||
|
Creative Distribution Solutions
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
|
Depreciation and amortization
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ | $ | ||||||
|
Creative Distribution Solutions
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
|
|
Nine
Months Ended
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Net sales
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ |
$ |
||||||
|
Creative Distribution Solutions
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
|
Gross profit
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ |
$ |
||||||
|
Creative Distribution Solutions
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
|
Operating income (loss)
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Corporate unallocated (1)(2)
|
(
|
)
|
(
|
)
|
||||
|
Total Zig-Zag and Stoker’s products
|
$ |
$ |
||||||
|
Creative Distribution Solutions
|
||||||||
|
Total
|
$
|
|
$
|
|
||||
|
Interest expense, net
|
|
|
||||||
|
Investment loss
|
|
|
||||||
|
Gain on extinguishment of debt
|
(
|
)
|
|
|||||
|
Income before income taxes
|
$
|
|
$
|
|
||||
|
Capital expenditures
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ |
|
$ |
|
||||
|
Creative Distribution Solutions
|
||||||||
|
Total
|
$
|
|
$
|
|
||||
|
Depreciation and amortization
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Total Zig-Zag and Stoker’s products
|
$ |
$ |
||||||
|
Creative Distribution Solutions
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
| (1) |
Includes corporate costs that are not allocated to any of the
|
| (2) |
|
| September 30, | December 31, | |||||||
|
2023
|
2022
|
|||||||
|
Assets
|
||||||||
|
Zig-Zag products
|
$
|
|
$
|
|
||||
|
Stoker’s products
|
|
|
||||||
|
Corporate unallocated (1)
|
|
|
||||||
| Total Zig-Zag and Stoker’s products | $ |
$ |
||||||
|
Creative Distribution Solutions
|
||||||||
|
Total
|
$
|
|
$
|
|
||||
| (1) |
|
Revenue Disaggregation—Sales Channel
Revenues of the Zig-Zag Products and Stoker’s Products segments are primarily comprised of sales made to wholesalers while Creative Distribution
Solutions sales are made business to business and business to consumer, both online and through our corporate retail stores. Creative Distribution Solutions net sales are broken out by sales channel below.
| |
Creative Distribution
Solutions Segment
|
|||||||
| Three Months Ended | ||||||||
|
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Business to Business
|
$
|
|
$
|
|
||||
|
Business to Consumer - Online
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
| |
Creative Distribution
Solutions Segment
|
|||||||
| Nine Months Ended | ||||||||
|
September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Business to Business
|
$
|
|
$
|
|
||||
|
Business to Consumer - Online
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
Net Sales—Domestic vs. Foreign
The following table shows a breakdown of consolidated net sales between domestic and foreign customers.
| Three Months Ended | ||||||||
| |
September 30,
|
|||||||
|
2023
|
2022
|
|||||||
|
Domestic
|
$
|
|
$
|
|
||||
|
Foreign
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
| Nine Months Ended | ||||||||
| |
September 30,
|
|||||||
|
2023
|
2022
|
|||||||
|
Domestic
|
$
|
|
$
|
|
||||
|
Foreign
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
Note 17. Additional Information with Respect to Unrestricted Subsidiary
Under the terms of the Senior Secured Notes Indenture and Senior Secured Notes, the Company has designated its subsidiaries, South Beach Brands LLC, TPB Beast LLC
and Intrepid Brands, LLC as “Unrestricted Subsidiaries”. South Beach Brands LLC is a holding company under which our vape business TPB Beast LLC operating as Creative Distribution Solutions sits. The Company is required under the terms of the
Senior Secured Notes Indenture and the Senior Secured Notes to present additional information that reflects the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Company’s Unrestricted Subsidiaries as of and for the periods presented. This additional information is below.
Income Statement for the Three Months Ended September 30, 2023 and 2022 (unaudited):
| Three Months Ended September 30 | ||||||||||||||||||||||||
| 2023 |
2022 | |||||||||||||||||||||||
|
Company and
Restricted
Subsidiaries
|
Unrestricted
Subsidiaries
|
Consolidated
|
Company and
Restricted
Subsidiaries
|
Unrestricted
Subsidiaries
|
Consolidated | |||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$ | $ | $ | |||||||||||||||
|
Cost of sales
|
|
|
|
|||||||||||||||||||||
|
Gross profit
|
|
|
|
|||||||||||||||||||||
|
Selling, general, and administrative expenses
|
|
|
|
|||||||||||||||||||||
|
Operating income
|
|
(
|
)
|
|
||||||||||||||||||||
|
Interest expense, net
|
|
|
|
|||||||||||||||||||||
|
Investment loss
|
|
|
|
( |
) | ( |
) | |||||||||||||||||
|
Gain on extinguishment of debt
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||
|
Income before income taxes
|
|
(
|
)
|
|
||||||||||||||||||||
|
Income tax expense
|
|
(
|
)
|
|
||||||||||||||||||||
|
Consolidated net income
|
|
(
|
)
|
|
||||||||||||||||||||
|
Net loss attributable to non-controlling interest
|
|
|
|
( |
) | ( |
) | |||||||||||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
(
|
)
|
$
|
|
$ | $ | $ | ||||||||||||||
Income Statement for the Nine Months Ended September 30, 2023 and 2022 (unaudited):
|
Nine Months Ended September 30
|
||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
|
Company and
Restricted
Subsidiaries
|
Unrestricted Subsidiaries
|
Consolidated
|
Company and
Restricted
Subsidiaries
|
Unrestricted Subsidiaries
|
Consolidated
|
|||||||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Cost of sales
|
|
|
|
|
|
|
||||||||||||||||||
|
Gross profit
|
|
|
|
|
|
|
||||||||||||||||||
|
Selling, general, and administrative expenses
|
|
|
|
|
|
|
||||||||||||||||||
|
Operating income
|
|
|
|
|
|
|
||||||||||||||||||
|
Interest expense, net
|
|
|
|
|
|
|
||||||||||||||||||
|
Investment loss
|
|
|
|
|
|
|
||||||||||||||||||
|
Gain on extinguishment of debt
|
(
|
)
|
|
(
|
)
|
|
|
|
||||||||||||||||
|
Income before income taxes
|
|
|
|
|
|
|
||||||||||||||||||
|
Income tax expense
|
|
|
|
|
|
|
||||||||||||||||||
|
Consolidated net income
|
|
|
|
|
|
|
||||||||||||||||||
|
Net loss attributable to non-controlling interest
|
(
|
)
|
|
(
|
)
|
(
|
)
|
|
(
|
)
|
||||||||||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
Balance Sheet as of September 30, 2023 (unaudited):
|
ASSETS
|
Company and
Restricted
Subsidiaries
|
Unrestricted
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||
|
Current assets:
|
||||||||||||||||
|
Cash
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||
|
Accounts receivable, net
|
|
|
|
|||||||||||||
|
Inventories
|
|
|
|
|||||||||||||
|
Other current assets
|
|
|
|
|||||||||||||
|
Total current assets
|
|
|
|
|||||||||||||
|
Property, plant, and equipment, net
|
|
|
|
|||||||||||||
|
Deferred income taxes
|
|
|
|
|||||||||||||
|
Right of use assets
|
|
|
|
|||||||||||||
|
Deferred financing costs, net
|
|
|
|
|||||||||||||
|
Goodwill
|
|
|
|
|||||||||||||
|
Other intangible assets, net
|
|
|
|
|||||||||||||
|
Master Settlement Agreement (MSA) escrow deposits
|
|
|
|
|||||||||||||
|
Other assets
|
|
|
|
|||||||||||||
| Investment in unrestricted subsidiaries |
( |
) | ||||||||||||||
|
Total assets
|
$
|
|
$
|
|
$ |
( |
) |
$
|
|
|||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||
|
Current liabilities:
|
||||||||||||||||
|
Accounts payable
|
$ | $ | $ |
$ | ||||||||||||
|
Accrued liabilities
|
|
|
|
|||||||||||||
|
Current portion of long-term debt
|
||||||||||||||||
|
Other current liabilities
|
|
|
|
|||||||||||||
|
Total current liabilities
|
|
|
|
|||||||||||||
|
Notes payable and long-term debt
|
|
|
|
|||||||||||||
|
Lease liabilities
|
|
|
|
|||||||||||||
|
Total liabilities
|
|
|
|
|||||||||||||
|
Commitments and contingencies
|
||||||||||||||||
|
Stockholders’ equity:
|
||||||||||||||||
|
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries
|
|
|
( |
) |
|
|||||||||||
|
Non-controlling interest
|
|
|
|
|||||||||||||
|
Total stockholders’ equity
|
|
|
( |
) |
|
|||||||||||
|
Total liabilities and stockholders’ equity
|
$
|
|
$
|
|
$ |
( |
) |
$
|
|
|||||||
Balance Sheet as of December 31, 2022:
|
ASSETS
|
Company and
Restricted
Subsidiaries
|
Unrestricted
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||
|
Current assets:
|
||||||||||||||||
|
Cash
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||
|
Accounts receivable, net
|
|
|
|
|||||||||||||
|
Inventories
|
|
|
|
|||||||||||||
|
Other current assets
|
|
|
|
|||||||||||||
|
Total current assets
|
|
|
|
|||||||||||||
|
Property, plant, and equipment, net
|
|
|
|
|||||||||||||
|
Deferred income taxes
|
|
|
|
|||||||||||||
|
Right of use assets
|
|
|
|
|||||||||||||
|
Deferred financing costs, net
|
|
|
|
|||||||||||||
|
Goodwill
|
|
|
|
|||||||||||||
|
Other intangible assets, net
|
|
|
|
|||||||||||||
|
Master Settlement Agreement (MSA) escrow deposits
|
|
|
|
|||||||||||||
|
Other assets
|
|
|
|
|||||||||||||
| Investment in unrestricted subsidiaries |
( |
) | ||||||||||||||
|
Total assets
|
$
|
|
$
|
|
$ |
( |
) |
$
|
|
|||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||
|
Current liabilities:
|
||||||||||||||||
|
Accounts payable
|
$
|
|
$
|
|
$ |
$
|
|
|||||||||
|
Accrued liabilities
|
|
|
|
|||||||||||||
|
Other current liabilities
|
|
|
|
|||||||||||||
|
Total current liabilities
|
|
|
|
|||||||||||||
|
Notes payable and long-term debt
|
|
|
|
|||||||||||||
|
Lease liabilities
|
|
|
|
|||||||||||||
|
Total liabilities
|
|
|
|
|||||||||||||
|
Commitments and contingencies
|
||||||||||||||||
|
Stockholders’ equity:
|
||||||||||||||||
|
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries
|
|
|
( |
) |
|
|||||||||||
|
Non-controlling interest
|
|
|
|
|||||||||||||
|
Total stockholders’ equity
|
|
|
( |
) |
|
|||||||||||
|
Total liabilities and stockholders’ equity
|
$
|
|
$
|
|
$ |
( |
) |
$
|
|
|
||||||
Note 18. Dividends and Share Repurchases
A dividend of $0.065 per common share
was paid on October 6, 2023 , to shareholders of record at the close of business on September 15, 2023 .
The Company currently pays a quarterly cash dividend. Dividends are considered restricted payments under the Senior Secured Notes Indenture and 2021
Revolving Credit Facility. The Company is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, the Company is not in default on its debt covenants. Additional earnings and market
capitalization restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year.
On February 25, 2020, the Company’s 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 of Directors. On October 25, 2021, the Board of Directors increased the approved share repurchase
program by $30.7 million and by an additional $24.6
million on February 24, 2022, in each case bringing the aggregate approval back to $50.0 27.2 million remains available for share repurchases under the program at September 30, 2023.
You should read the following discussion of the historical financial conditions and results of operations in conjunction with our 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 which are 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 Management’s Discussion and Analysis (“MD&A”) relates to the unaudited financial statements of Turning Point Brands, Inc., included elsewhere in this Quarterly
Report on Form 10-Q. The MD&A is intended to enable the reader to understand the Company’s financial condition and results of operations, including any material changes in the Company’s financial condition and results of operations since December
31, 2022, and as compared with the three and nine months ended September 30, 2022. The MD&A is provided as a supplement to and should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this
Quarterly report on Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
In this MD&A, 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. 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 annualized growth over the three-year period ended 2022 as reported by Management Science Associates, Inc., a third-party
analytics and information company. Our segments are led by our core, proprietary brands: Zig-Zag® and
CLIPPER® in the Zig-Zag Products segment and Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s 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. Our products are currently available in approximately 197,000 U.S.
retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 217,000 points of distribution. Our sales team targets widespread distribution to all traditional retail channels,
including convenience stores. We also have a growing e-commerce business.
In the fourth quarter of 2022, we contributed our NewGen Products business to South Beach Holdings LLC doing business as Creative Distribution Solutions (“CDS”), a newly-formed wholly-owned
subsidiary. CDS is separately operated and reports to its own Board of Directors. During the first quarter of 2023, the business was designated an unrestricted subsidiary under the Senior Secured Notes (the “Notes”) and concurrently we renamed what
we previously referred to as our NewGen Products segment as our Creative Distribution Solutions segment as we believe this name better aligns with the goals and strategies of the segment.
Products
We operate in three segments: Zig-Zag Products, Stoker’s Products and Creative Distribution Solutions. 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 and (iii) lighters and other accessories. In addition, we have a majority stake in Turning Point Brands Canada which markets and distributes cannabis
accessories and tobacco products throughout Canada. 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 Creative Distribution
Solutions 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.
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 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 75% 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;
|
| ● |
Cost and increasing regulation of promotional and advertising activities;
|
| ● |
General economic conditions, including consumer access to disposable income and other conditions affecting purchasing power such as inflation;
|
| ● |
Labor and production costs;
|
| ● |
Cost of complying with regulation, including the “deeming regulation”;
|
| ● |
Increasing and unpredictable regulation and/or marketing order decisions impacting Creative Distribution Solutions 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.
|
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 2022 Annual Report on Form 10-K.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that impact the Company.
Recent Developments
On November 7, 2023, a wholly-owned subsidiary of the Company (the “ABL Borrower”) entered into a new $75.0 million asset-backed revolving
credit facility (the “2023 ABL Facility”). The Company intends to use borrowings distributed to it by ABL Borrower under the 2023 ABL Facility to refinance a portion of the Convertible Senior Notes at maturity. In connection with entry into the
2023 ABL Facility, the Company terminated the Amended Revolving Credit Agreement originally entered into in 2021. See Part II Other Information --Item 5. Other Information.
Results of Operations
Comparison of the Three Months Ended September 30, 2023, to the Three Months Ended September 30, 2022
The table and discussion set forth below displays our consolidated results of operations (in thousands):
|
Three Months Ended September 30,
|
||||||||||||
|
2023
|
2022
|
% Change
|
||||||||||
|
Consolidated Results of Operations Data:
|
||||||||||||
|
Net sales
|
||||||||||||
|
Zig-Zag products
|
$
|
46,754
|
$
|
52,061
|
-10.2
|
%
|
||||||
|
Stoker’s products
|
36,916
|
33,525
|
10.1
|
%
|
||||||||
|
Total Zig-Zag and Stoker’s products
|
83,670
|
85,586
|
-2.2
|
%
|
||||||||
|
Creative Distribution Solutions
|
18,052
|
22,216
|
-18.7
|
%
|
||||||||
|
Total net sales
|
101,722
|
107,802
|
-5.6
|
%
|
||||||||
|
Cost of sales
|
50,100
|
55,090
|
-9.1
|
%
|
||||||||
|
Gross profit
|
||||||||||||
|
Zig-Zag products
|
26,745
|
28,035
|
-4.6
|
%
|
||||||||
|
Stoker’s products
|
20,572
|
18,279
|
12.5
|
%
|
||||||||
|
Total Zig-Zag and Stoker’s products
|
47,317
|
46,314
|
2.2
|
%
|
||||||||
|
Creative Distribution Solutions
|
4,305
|
6,398
|
-32.7
|
%
|
||||||||
|
Total gross profit
|
51,622
|
52,712
|
-2.1
|
%
|
||||||||
|
Selling, general, and administrative expenses
|
31,385
|
32,891
|
-4.6
|
%
|
||||||||
|
Operating income
|
20,237
|
19,821
|
2.1
|
%
|
||||||||
|
Interest expense, net
|
3,984
|
4,802
|
-17.0
|
%
|
||||||||
|
Investment loss (gain)
|
2,101
|
(75
|
)
|
-2,901.3
|
%
|
|||||||
|
Gain on extinguishment of debt
|
(481
|
)
|
–
|
NM
|
||||||||
|
Income before income taxes
|
14,633
|
15,094
|
-3.1
|
%
|
||||||||
|
Income tax expense
|
3,767
|
3,797
|
-0.8
|
%
|
||||||||
|
Consolidated net income
|
10,866
|
11,297
|
-3.8
|
%
|
||||||||
|
Net gain (loss) attributable to non-controlling interest
|
35
|
(239
|
)
|
-114.6
|
%
|
|||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
10,831
|
$
|
11,536
|
-6.1
|
%
|
||||||
Net Sales: For the three months ended September 30, 2023, consolidated net sales decreased to $101.7 million from $107.8 million for the three months ended
September 30, 2022, a decrease of $6.1 million or 5.6%.
For the three months ended September 30, 2023, net sales in the Zig-Zag Products segment decreased to $46.8 million from $52.1 million for the three months ended September 30, 2022, a decrease of
$5.3 million or 10.2%. The decrease in net sales was driven by the benefits in the third quarter of 2022 from the initial load-in of CLIPPER lighters and approximately $5 million of sales that were pulled forward from the fourth quarter of last year
due to the timing of promotional activities and Canadian deliveries. Additionally, a discontinuation of an unprofitable product line impacted Canadian sales by $1.8 million.
For the three months ended September 30, 2023, net sales in the Stoker’s Products segment increased to $36.9 million from $33.5 million for the three months ended September 30, 2022, an increase of
$3.4 million or 10.1%. For the three months ended September 30, 2023, volume increased 2.2% and price/product mix increased 7.9%. The increase in net sales was driven by double-digit growth of Stoker’s® MST and single-digit growth in loose-leaf chewing tobacco.
For the three months ended September 30, 2023, net sales in the Creative Distribution Solutions segment decreased to $18.1 million from $22.2 million for the three months ended September 30, 2022,
a decrease of $4.1 million or 18.7%. The decrease in net sales was primarily the result of lower volumes in the vape distribution businesses.
Gross Profit: For the three months ended September 30, 2023, consolidated gross profit decreased to $51.6 million from $52.7 million for the three months ended
September 30, 2022, a decrease of $1.1 million or 2.1%. Gross profit as a percentage of net sales increased to 50.7% for the three months ended September 30, 2023, compared to 48.9% for the three months ended September 30, 2022 driven by decreased
margin in Creative Distribution Solutions partially offset by increased margins in the Stoker’s Products and Zig-Zag Products segments.
For the three months ended September 30, 2023, gross profit in the Zig-Zag Products segment decreased to $26.7 million from $28.0 million for the three months ended September 30, 2022, a decrease
of $1.3 million or 4.6% . Gross profit as a percentage of net sales increased to 57.2% of net sales for the three months ended September 30, 2023, from 53.9% of net sales for the three months ended September 30, 2022, driven primarily by product mix.
For the three months ended September 30, 2023, gross profit in the Stoker’s Products segment increased to $20.6 million from $18.3 million for the three months ended September 30, 2022, an increase
of $2.3 million or 12.5%. Gross profit as a percentage of net sales increased to 55.7% of net sales for the three months ended September 30, 2023, from 54.5% of net sales for the three months ended September 30, 2022, primarily as a result of strong
market share gains in MST and loose-leaf chewing tobacco and pricing gains in MST.
For the three months ended September 30, 2023, gross profit in the Creative Distribution Solutions segment decreased to $4.3 million from $6.4 million for the three months ended September 30, 2022,
a decrease of $2.1 million or 32.7%. Gross profit as a percentage of net sales decreased to 23.8% of net sales for the three months ended September 30, 2023, from 28.8% of net sales for the three months ended September 30, 2022, primarily as a result
of channel mix.
Selling, General, and Administrative Expenses: For the three months ended September 30, 2023, selling, general, and administrative expenses decreased to $31.4
million from $32.9 million for the three months ended September 30, 2022, a decrease of $1.5 million or 4.6%. Selling, general and administrative expenses in the three months ended September 30, 2023, included $1.8 million of stock options,
restricted stock and incentives expense, $0.3 million of expense related to PMTA, $0.2 million of expense related to corporate restructuring, $0.1 million of transaction costs and $0.1 million of expense related to the new ERP and CRM systems.
Selling, general and administrative expenses in the three months ended September 30, 2022, included $1.4 million of stock option, 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.
Interest Expense, net: For the three months ended September 30, 2023, interest expense, net decreased to $4.0 million from $4.8 million for the three months
ended September 30, 2022 as a result of the repurchase of $54.0 million total of Convertible Senior Notes as of September 30, 2023, and increased interest income on cash as a result of rising interest rates.
Investment Loss (Gain): For the three months ended September 30, 2023, investment loss increased to $2.1 million compared to a $0.1 million gain for the three
months ended September 30, 2022. The change is a result of an impairment charge recognized on our investment in Wild Hemp for $2.2 million in the third quarter of 2023.
Gain on Extinguishment of Debt: There was a gain on extinguishment of debt of $0.5 million for the three months ended September 30, 2023 as a result of
repurchasing $15.0 million of Convertible Senior Notes compared to no gain on extinguishment of debt for the three months ended September 30, 2022.
Income Tax Expense: Our income tax expense of $3.8 million was 25.7% of income before income taxes for the three months ended September 30, 2023. Our effective
income tax rate was 25.2% for the three months ended September 30, 2022.
Net Gain (Loss) Attributable to Non-Controlling Interest: Net gain attributable to non-controlling interest was $0.0 million for the three months ended
September 30, 2023 compared to $0.2 million net loss for the three months ended September 30, 2022.
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, 2023 and 2022, was $10.8 million and $11.5 million, respectively.
Comparison of the Nine Months Ended September 30, 2023, to the Six Months Ended September 30, 2022
The table and discussion set forth below displays our consolidated results of operations (in thousands):
|
Nine Months Ended September 30,
|
||||||||||||
|
2023
|
2022
|
% Change
|
||||||||||
|
Consolidated Results of Operations Data:
|
||||||||||||
|
Net sales
|
||||||||||||
|
Zig-Zag products
|
$
|
135,363
|
$
|
143,959
|
-6.0
|
%
|
||||||
|
Stoker’s products
|
106,634
|
98,816
|
7.9
|
%
|
||||||||
|
Total Zig-Zag and Stoker’s products
|
241,997
|
242,775
|
-0.3
|
%
|
||||||||
|
Creative Distribution Solutions
|
66,276
|
68,846
|
-3.7
|
%
|
||||||||
|
Total net sales
|
308,273
|
311,621
|
-1.1
|
%
|
||||||||
|
Cost of sales
|
155,556
|
155,646
|
-0.1
|
%
|
||||||||
|
Gross profit
|
||||||||||||
|
Zig-Zag products
|
75,557
|
80,808
|
-6.5
|
%
|
||||||||
|
Stoker’s products
|
60,005
|
54,044
|
11.0
|
%
|
||||||||
|
Total Zig-Zag and Stoker’s products
|
135,562
|
134,852
|
0.5
|
%
|
||||||||
|
Creative Distribution Solutions
|
17,155
|
21,123
|
-18.8
|
%
|
||||||||
|
Total gross profit
|
152,717
|
155,975
|
-2.1
|
%
|
||||||||
|
Selling, general, and administrative expenses
|
94,093
|
98,779
|
-4.7
|
%
|
||||||||
|
Operating income
|
58,624
|
57,196
|
2.5
|
%
|
||||||||
|
Interest expense, net
|
12,013
|
15,142
|
-20.7
|
%
|
||||||||
|
Investment loss
|
10,980
|
6,074
|
80.8
|
%
|
||||||||
|
Gain on extinguishment of debt
|
(1,858
|
)
|
–
|
NM
|
||||||||
|
Income before income taxes
|
37,489
|
35,980
|
4.2
|
%
|
||||||||
|
Income tax expense
|
9,573
|
8,706
|
10.0
|
%
|
||||||||
|
Consolidated net income
|
27,916
|
27,274
|
2.4
|
%
|
||||||||
|
Net loss attributable to non-controlling interest
|
(437
|
)
|
(684
|
)
|
-36.1
|
%
|
||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
28,353
|
$
|
27,958
|
1.4
|
%
|
||||||
Net Sales: For the nine months ended September 30, 2023, consolidated net sales decreased to $308.3 million from $311.6 million for the nine months ended
September 30, 2022, a decrease of $3.3 million or 1.1%.
For the nine months ended September 30, 2023, net sales in the Zig-Zag Products segment decreased to $135.4 million from $144.0 million for the nine months ended September 30, 2022, a decrease of
$8.6 million or 6.0%. The decrease in net sales was driven by anticipated declines in the U.S. rolling papers and wraps businesses which were impacted by a reduction of trade inventory, offset by growth in our Clipper business. Additionally, a
discontinuation of an unprofitable product line negatively impacted Canadian sales by $3.6 million against the previous year.
For the nine months ended September 30, 2023, net sales in the Stoker’s Products segment increased to $106.6 million from $98.8 million for the nine months ended September 30, 2022, an increase of
$7.8 million or 7.9%. For the nine months ended September 30, 2023, volume increased 1.0% and price/product mix increased 6.9%. The increase in net sales was driven primarily by double-digit growth of Stoker’s® MST.
For the nine months ended September 30, 2023, net sales in the Creative Distribution Solutions segment decreased to $66.3 million from $68.8 million for the nine months ended September 30, 2022, a
decrease of $2.5 million or 3.7%. The decrease in net sales was primarily the result of reduced volumes in the vape distribution business.
Gross Profit: For the nine months ended September 30, 2023, consolidated gross profit decreased to $152.7 million from $156.0 million for the nine months ended
September 30, 2022, a decrease of $3.3 million or 2.1%. Gross profit as a percentage of net sales decreased to 49.5% for the nine months ended September 30, 2023, compared to 50.1% for the nine months ended September 30, 2022 driven by decreased
margin in the Zig-Zag Products and Creative Distribution Solutions segments partially offset by increased margin in the Stoker’s Products segment.
For the nine months ended September 30, 2023, gross profit in the Zig-Zag Products segment decreased to $75.6 million from $80.8 million for the nine months ended September 30, 2022, a decrease of
$5.2 million or 6.5%. Gross profit as a percentage of net sales decreased to 55.8% of net sales for the nine months ended September 30, 2023, from 56.1% of net sales for the nine months ended September 30, 2022, as a result of product mix including
the decline in net sales of higher margin U.S. rolling paper and wraps products and contribution of CLIPPER lighters, as a result of the exclusive distribution deal entered into in February 2022, which operates at lower gross profit margins.
For the nine months ended September 30, 2023, gross profit in the Stoker’s Products segment increased to $60.0 million from $54.0 million for the nine months ended September 30, 2022, an increase
of $6.0 million or 11.0%. Gross profit as a percentage of net sales increased to 56.3% of net sales for the nine months ended September 30, 2023, from 54.7% of net sales for the nine months ended September 30, 2022, primarily as a result of the
strong incremental margin contribution of MST.
For the nine months ended September 30, 2023, gross profit in the Creative Distribution Solutions segment decreased to $17.2 million from $21.1 million for the nine months ended September 30, 2022,
a decrease of $3.9 million or 18.8%. Gross profit as a percentage of net sales decreased to 25.9% of net sales for the nine months ended September 30, 2023, from 30.7% of net sales for the nine months ended September 30, 2022, primarily as a result
of channel mix.
Selling, General, and Administrative Expenses: For the nine months ended September 30, 2023, selling, general, and administrative expenses decreased to $94.1
million from $98.8 million for the nine months ended September 30, 2022, a decrease of $4.7 million or 4.7%. Selling, general and administrative expenses in the nine months ended September 30, 2023, included $4.7 million of stock options, restricted
stock and incentives expense, $1.1 million of expense related to PMTA, $0.2 million of expense related to corporate restructuring, $0.4 million of expense related to the new ERP and CRM systems and $0.2 million related to transaction costs. Selling,
general and administrative expenses in the nine months ended September 30, 2022, included $4.1 million of stock option, restricted stock and incentives expense, $0.8 million of transaction costs, $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 of the new ERP and CRM systems.
Interest Expense, net: For the nine months ended September 30, 2023, interest expense, net decreased to $12.0 million, from $15.1 million for the nine months
ended September 30, 2022 as a result of the repurchases of $44.0 million of Convertible Senior Notes through the third quarter of 2023, and increased interest income on cash as a result of rising interest rates.
Investment Loss: For the nine months ended September 30, 2023, investment loss increased to $10.9 million compared to $6.1 million for the nine months ended
September 30, 2022. The change is a result of the year-to-date impairment charges recognized on our investments in Docklight and Wild Hemp for $6.5 million and $2.2 million, respectively, compared to an impairment charge of $6.3 million in the
second quarter of 2022 related to our investment in Dosist.
Gain on Extinguishment of Debt: There was a gain on extinguishment of debt of $1.9 million for the nine months ended September 30, 2023 as a result of
repurchasing $44.0 million of Convertible Senior Notes through the third quarter of 2023 compared to no gain on extinguishment of debt for the nine months ended September 30, 2022.
Income Tax Expense: Our income tax expense of $9.6 million was 25.5% of income before income taxes for the nine months ended September 30, 2023. Our effective
income tax rate was 24.2% for the nine months ended September 30, 2022 and included a discrete tax benefit $0.7 million relating to stock option exercises.
Net Loss Attributable to Non-Controlling Interest: Net loss attributable to non-controlling interest was $0.4 million for the nine months ended September 30,
2023 compared to $0.7 million for the nine months ended September 30, 2022.
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, 2023 and 2022, was $28.4 million and $28.0 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, gain (loss) on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define “Adjusted EBITDA” as net
income before interest expense, gain (loss) on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider the 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.
|
(in thousands)
|
Three Months Ended
September 30,
|
|||||||
|
2023
|
2022
|
|||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
10,831
|
$
|
11,536
|
||||
|
Add:
|
||||||||
|
Interest expense, net
|
3,984
|
4,802
|
||||||
|
Gain on extinguishment of debt
|
(481
|
)
|
–
|
|||||
|
Income tax expense
|
3,767
|
3,797
|
||||||
|
Depreciation expense
|
782
|
861
|
||||||
|
Amortization expense
|
844
|
454
|
||||||
|
EBITDA
|
$
|
19,727
|
$
|
21,450
|
||||
|
Components of Adjusted EBITDA
|
||||||||
|
Corporate restructuring (a)
|
190
|
17
|
||||||
|
ERP/CRM (b)
|
138
|
435
|
||||||
|
Stock options, restricted stock, and incentives expense (c)
|
1,824
|
1,442
|
||||||
|
Transactional expenses (d)
|
76
|
–
|
||||||
|
FDA PMTA (e)
|
275
|
1,169
|
||||||
|
Non-cash asset impairment (f)
|
2,173
|
–
|
||||||
|
Adjusted EBITDA
|
$
|
24,403
|
$
|
24,513
|
||||
| (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 assets.
|
|
(in thousands)
|
Nine Months Ended
September 30,
|
|||||||
|
2023
|
2022
|
|||||||
|
Net income attributable to Turning Point Brands, Inc.
|
$
|
28,353
|
$
|
27,958
|
||||
|
Add:
|
||||||||
|
Interest expense, net
|
12,013
|
15,142
|
||||||
|
Gain on extinguishment of debt
|
(1,858
|
)
|
–
|
|||||
|
Income tax expense
|
9,573
|
8,706
|
||||||
|
Depreciation expense
|
2,317
|
2,611
|
||||||
|
Amortization expense
|
2,386
|
1,373
|
||||||
|
EBITDA
|
$
|
52,784
|
$
|
55,790
|
||||
|
Components of Adjusted EBITDA
|
||||||||
|
Corporate restructuring (a)
|
190
|
1,619
|
||||||
|
ERP/CRM (b)
|
414
|
1,626
|
||||||
|
Stock options, restricted stock, and incentives expense (c)
|
4,660
|
4,103
|
||||||
|
Transactional expenses (d)
|
162
|
789
|
||||||
|
FDA PMTA (e)
|
1,095
|
4,265
|
||||||
|
Non-cash asset impairment (f)
|
11,162
|
6,300
|
||||||
|
Adjusted EBITDA
|
$
|
70,467
|
$
|
74,492
|
||||
| (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 assets.
|
Liquidity and Capital Resources
As of September 30, 2023, we had $96.1 million of cash on hand and have $23.6 million of availability under the 2021 Amended Revolving
Credit Facility. Our principal uses for cash are working capital, debt service, and capital expenditures.
Our Convertible Senior Notes, with an outstanding balance of $118.5 million as of September 30, 2023, mature in July of 2024. On November
7, 2023, one of our wholly-owned subsidiaries entered into a new 2023 ABL Facility to refinance up to $75.0 million of the Convertible Senior Notes at maturity. As a result, we reclassified $70.0 million related to the Convertible Senior Notes from
short-term to long-term liabilities on our September 30, 2023 Balance Sheet. With our strong cash balance, free cash flow generation and borrowing availability under the 2023 ABL Facility, we expect to have ample liquidity to address the remaining
balance of the Convertible Senior Notes maturing next year, and to satisfy our operating cash requirements for the foreseeable future.
Our working capital, which we define as current assets less cash and current liabilities, decreased to $64.0 million at September 30, 2023,
compared with $109.9 million at December 31, 2022 as a result of a portion of the Convertible Senior Notes becoming current during the quarter.
|
As of
|
||||||||
|
(in thousands)
|
September 30,
2023
|
December 31,
2022
|
||||||
|
Current assets
|
$
|
150,741
|
$
|
151,251
|
||||
|
Current liabilities
|
86,718
|
41,376
|
||||||
|
Working capital
|
$
|
64,023
|
$
|
109,875
|
||||
Cash Flows from Operating Activities
For the nine months ended September 30, 2023, net cash provided by operating activities was $40.0 million compared to net cash provided by operating activities of $16.4 million for the nine
months ended September 30, 2022, an increase of $23.6 million, primarily due to the timing of changes of inventory and other working capital.
Cash Flows from Investing Activities
For the nine months ended September 30, 2023, net cash used in investing activities was $4.4 million compared to net cash used in investing activities of $17.8 million for the nine months ended
September 30, 2022, a reduction in cash used in investing activities of $13.4 million, primarily due to a decrease in purchases of investments in our MSA escrow account.
Cash Flows from Financing Activities
For the nine months ended September 30, 2023, net cash used in financing activities was $46.0 million compared to net cash used in financing activities of $31.2 million for the nine months ended
September 30, 2022, an increase of $14.8 million, primarily due to $41.8 million in repurchases of Convertible Senior Notes during the period, offset by a decrease in repurchases of common stock of $27.0 million during 2023.
Dividends and Share Repurchase
A dividend of $0.065 per common share was paid on October 6, 2023, to shareholders of record at the close of business on September 15, 2023.
On February 25, 2020, our Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market
dynamics. The program is subject to the ongoing discretion of the Board of Directors. On October 25, 2021, the Board of Directors increased the approved share repurchase program by $30.7 million and by an additional $24.6 million on February 24,
2022. $27.2 million remains available for share repurchases under the program as of September 30, 2023.
Long-Term Debt
As of September 30, 2023, we were in compliance with the financial and restrictive covenants of the Senior Secured Notes and 2021 Revolving Credit Facility. The following table provides outstanding
balances of our debt instruments.
|
September 30,
2023
|
December 31,
2022
|
|||||||
|
Senior Secured Notes
|
$
|
250,000
|
$
|
250,000
|
||||
|
Convertible Senior Notes
|
118,541
|
162,500
|
||||||
|
Gross notes payable and long-term debt
|
368,541
|
412,500
|
||||||
|
Less deferred finance charges
|
(3,720
|
)
|
(5,743
|
)
|
||||
|
Less current maturities
|
(48,248
|
)
|
-
|
|||||
|
Notes payable and long-term debt
|
$
|
316,573
|
$
|
406,757
|
||||
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.
The Company may redeem the Senior Secured Notes, in whole or in part, at any time on or after February 15, 2023, at the redemption prices (expressed as a percentage of the principal amount to be
redeemed) set forth below, plus accrued and unpaid interest, if any, on the Senior Secured Notes to be redeemed to (but not including) the applicable redemption date if redeemed during the period indicated below:
|
On or after February 15, 2023
|
102.813
|
%
|
||
|
On or after February 15, 2024
|
101.406
|
%
|
||
|
On or after February 15, 2025 and thereafter
|
100.000
|
%
|
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 Senior Secured Notes 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 Senior Secured Notes
Indenture. The Senior Secured Notes Indenture provides for customary events of default. We were in compliance with all covenants as of September 30, 2023.
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 and Barclays
Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). On May 10, 2023, the Company and certain of its subsidiaries, as guarantors, entered into an amendment (the “Amendment”) to the 2021 Revolving Credit Facility (as
amended, the “Amended Revolving Credit Facility”). The Amendment includes certain modifications to the 2021 Revolving Credit Facility relating to the replacement of the London Inter-Bank Offered Rate with a Secured Overnight Financing Rate (“SOFR”)
as the interest rate benchmark under the 2021 Revolving Credit Facility and adjusts certain other provisions to reflect current documentation standards and other agreed modifications.
Letters of credit are limited to $10.0 million (and are a part of, and not in addition to, the revolving line of credit). We have not drawn any borrowings under the Amended Revolving Credit
Facility but do have letters of credit of approximately $1.4 million outstanding under the facility as of March 31, 2023. The Amended 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 Amended 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate of Term SOFR rate, as applicable, 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 Amended Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the Amended Revolving
Credit Facility are secured on a pari passu basis with the Senior Secured Notes.
The Amended Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The Amended Revolving Credit Facility also requires
the maintenance of a Consolidated Leverage Ratio 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 Amended 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 Amended Revolving Credit Facility. The Amended Revolving Credit Agreement provides for customary events of default. We were in compliance with all covenants as of September 30, 2023.
We incurred debt issuance costs attributable to the issuance of the Amended Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method
over the expected life of the Amended Revolving Credit Facility.
On November 7, 2023, the Company terminated the Amended Revolving Credit Agreement in connection with entry into the new 2023 ABL
Facility by one of its subsidiaries.
2023 ABL Facility
On November 7, 2023, TPB Specialty Finance, LLC, a wholly-owned subsidiary of the Company (the “ABL Borrower”), entered into a $75.0
million asset-backed revolving credit facility (the “2023 ABL Facility”), with the several lenders thereunder, and Barclays Bank Plc, as administrative agent (the “Administrative Agent”) and as collateral agent (the “Collateral Agent”) and
First-Citizens Bank & Trust Company as additional collateral agent (the “Additional Collateral Agent”). Under the 2023 ABL Facility, the ABL Borrower may draw up to $75.0 million under Revolving Credit Loans and LILO Loans. The 2023 ABL
Facility includes a $40.0 million accordion feature. In connection with the 2023 ABL Facility, Turning Point Brands contributed certain existing inventory to the ABL Borrower. The 2023 ABL Facility is secured on a first priority basis (subject to
customary exceptions) by all assets of the ABL Borrower.
The 2023 ABL Facility contains customary borrowing
conditions including a borrowing base equal to the sum of (a) the lesser of (1) 85% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL
Borrower and (B) 85% of the cost of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (2) 85% of the net orderly liquidation value (“NOLV”) percentage of the lower of (1)(A) or (1)(B); plus (b) 85% of the
face value of all eligible accounts of the ABL Borrower minus (c) the amount of all eligible reserves. The 2023 ABL Facility also includes a “last in last out” (“LILO”) borrowing base equal to the sum of (a) the lesser of: (1) 10% of the lower of
(A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) the cost of the sum of eligible inventory, plus eligible in-transit inventory and (2) 10% of the
NOLV percentage of the lower of (1)(A) or (1)(B); plus (b) 10% of the face amount of eligible account; minus (c) the amount of all eligible reserves.
Amounts borrowed under the 2023 ABL Facility are subject
to an interest rate margin per annum equal to (a) from and after the closing date until the last day of the first full fiscal quarter
ended after the closing date, (i) 1.25% per annum, in the case base rate loans, and (ii) 2.25% per annum, in the case of revolving credit loans that are SOFR Loans, (b)(i) 2.25% per annum, in the case of LILO loans that are base rate loans, and
(ii) 3.25% per annum, in the case of LILO loans that are SOFR loans, (c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below based upon the historical excess availability
for the most recent fiscal quarter ended immediately prior to the relevant date, as calculated by the Administrative Agent.
|
Level
|
Historical Excess Availability
|
Applicable Margin
for SOFR Loans
|
Applicable Margin
for Base Rate Loans
|
|
I
|
Greater than or equal to 66.66%
|
1.75%
|
0.75%
|
|
II
|
Less than 66.66%, but greater than or equal to 33.33%
|
2.00%
|
1.00%
|
|
III
|
Less than 33.33%
|
2.25%
|
1.25%
|
The 2023 ABL Facility also requires the Company and its
restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters on or after the closing date if excess availability shall be less than the greater of (a) 12.5% of the line cap and (b) $9.4 million, at any time and continuing until excess availability is equal to or exceeds the greater of (i)
12.5% of the line and (ii) $9.4 million for thirty (30) consecutive calendar days; provided that such $9.4 million level shall automatically increase in proportion to the amount of any increase in the aggregate revolving credit commitments
thereunder in connection with any incremental facility.
The 2023 ABL Facility shall mature on the earlier of (x) November 7, 2027 and (y) the date that is 91 days prior to the maturity date
of any material debt of the ABL Borrower or the Company or any of its restricted subsidiaries (subject to customary extensions agreed by the lenders thereunder); provided that clause (y) shall not apply to the extent that on any applicable date
of determination (on any date prior to the date set forth in clause (y)), (A) the sum of (x) cash that is held in escrow for the repayment of such material debt pursuant to arrangements satisfactory to the Administrative Agent, (y) cash that is
held in accounts with the Administrative Agent and/or the Additional Collateral Agent, plus (z) excess availability, is sufficient to repay such material debt and (B) the ABL Borrower has excess availability of at least $15.0 million after giving
effect to such repayment of material debt, including any borrowings under the commitments in connection therewith.
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.
In the fourth quarter of 2022, a wholly owned subsidiary of the Company repurchased $10.0 million in aggregate principal amount of the Convertible Senior Notes on the open market resulting in a
$0.9 million gain on extinguishment of debt. Subsequent principal repurchases occurred in the first, second and third quarters of 2023 for $13.9 million, $15.1 million and $15.0 million, respectively, in aggregate principal amounts resulting in gains
on extinguishment of debt of $0.7 million, $0.6 million and $0.6 million, respectively. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable securities law. As of September 30, 2023,
$118.5 million aggregate principal remains outstanding and held by third parties.
The Convertible Senior Notes held by third parties are convertible into approximately 2,216,029 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of
18.6942 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.49 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 Company in excess of pre-determined thresholds of $0.04 per share. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash
and stock, as determined by the Company at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of 2023.
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 $53.49 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.
Off-balance Sheet Arrangements
During the nine months ended September 30, 2023, we executed various foreign exchange contracts for the purchase of €20.1 million and sale of €15.2 million with maturity dates ranging from October
2023 to September 2024. At September 30, 2023, we had foreign currency contracts outstanding for the purchase of €17.1 million and sale of €15.2 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 a liability of $0.5 million included in Accrued liabilities at September 30, 2023. During 2022, we executed various foreign currency contracts for the purchase of €28.9 million and sale
of €28.9 million. At December 31, 2022, we had foreign currency contracts for the purchase of €18.5 million and sale of €18.5 million. The fair value of the foreign currency contracts resulted in an asset of $1.2 million included in Other current
assets and a liability of $0.0 million included in Accrued liabilities at December 31, 2022.
Inflation
Inflation in general, and the recent rapid increases in gas prices have had a substantial negative effect on the purchasing power of consumers. While historically, we have been able to increase
prices at a rate equal to or greater than that of inflation, doing so would be difficult in the current inflationary environment. However, we have implemented price increases in areas where doing so has been feasible. In addition, we have been able
to maintain a relatively stable variable cost structure for our products due, in part, to our successful procurement regarding our tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers.
Foreign Currency Sensitivity
There have been no material changes in our exposure to exchange rate fluctuation risk, as reported within our 2022 Annual Report on Form 10-K, during the quarter ended September 30, 2023. Please
refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2022 Annual Report on Form 10-K filed with the SEC.
Credit Risk
There have been no material changes in our exposure to credit risk, as reported within our 2022 Annual Report on Form 10-K, during the nine months ended September 30, 2023. Please refer to our
‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2022 Annual Report on Form 10-K filed with the SEC.
Interest Rate Sensitivity
In February 2021, we issued the Senior Secured Notes in an aggregate principal amount of $250 million. In July 2019, we issued Convertible Senior Notes in an aggregate principal amount of $172.5
million. We carry the Senior Secured Notes and Convertible Senior Notes at face value. Since the Senior Secured Notes and Convertible Senior Notes bear interest at a fixed rate, we have no financial statement risk associated with changes in interest
rates. However, the fair value of the Convertible Senior Notes changes when the market price of our stock fluctuates, or interest rates change. Our remaining debt instrument is a revolving credit facility, which has no borrowing outstanding.
We have carried out an evaluation under the supervision, and with the participation of, our management including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and Chief
Accounting Officer (“CAO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended as of September 30, 2023. Based upon the
evaluation, our CEO, CFO, and CAO concluded our disclosure controls and procedures are not effective as of such date solely due to material weaknesses in internal controls over financial reporting that were disclosed in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2022.
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, during our evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2022, we concluded that our internal control over financial reporting was not effective solely due to the existence of the following material weaknesses: we did not design and maintain effective internal
controls related to our information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology systems that support the Company’s financial reporting processes. Our business
process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. We also did not appropriately design and operate controls associated with the risk
assessment component of the internal control framework, specifically as it relates to identifying risks around segregation of duties within the financial reporting function, and the identification of all risks relating to the financial statements and
controls that would address such risks. This impacts business process controls (automated and manual) throughout financial reporting and the business transaction cycles.
The material weaknesses did not result in any identified misstatements to our financial statements, and there were no changes to previously released financial results. The material weaknesses will
not be considered remediated until the applicable controls operate for a sufficient period of time, and management has concluded through testing that these controls are operating effectively.
During the nine months ended September 30, 2023, we have continued to make progress on our remediation plans to address the material weaknesses in the Company’s internal controls over financial
reporting. These remediation efforts include hiring additional experienced accounting and internal control specialists and external consultants. In addition, the Company is in process of redesigning key controls for both business processes and
information technology controls along with implementing a new enterprise resource planning system.
PART II—OTHER INFORMATION
For a description of our material pending legal proceedings, please see Contingencies in Note 14 to the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.
See ‘Risk Factors—We may become subject to significant product liability litigation’ within our 2022 Annual Report on Form 10-K for additional details.
In addition to the other information set forth in this report, carefully consider the factors discussed in the ‘Risk Factors’ section contained in our 2022 Annual Report on Form 10-K. There have
been no material changes to the Risk Factors set forth in the 2022 Annual Report on Form 10-K.
On February 25, 2020, the Company’s 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 of Directors increased the approved share repurchase program by $30.7 million bringing the authority at the time back to $50.0 million
(including approximately $19.3 million available for repurchases under the Board of Directors’ previous authorization). On February 24, 2022, the Board of Directors increased the approved share repurchase program by $24.6 million bringing total
authority at that time to $50.0 million. This share repurchase program has no expiration date and is subject to the ongoing discretion of the Board of Directors. All repurchases to date under our stock repurchase programs have been made through
open market transactions, but in the future, we may also purchase shares through privately negotiated transactions or 10b5-1
For the quarter ended September 30, 2023, the Company made no purchases of its common stock in connection with the repurchase program described above.
Not applicable.
Not applicable.
Disclosure Pursuant to Item 1.01 of Current Report on Form 8-K - Entry into a Material Definitive Agreement.
On November 7, 2023, TPB Specialty Finance, LLC, a wholly-owned subsidiary of the Company (the “ABL Borrower”), entered into a new $75.0
million asset-backed revolving credit facility (the “2023 ABL Facility”), with the several lenders thereunder, and Barclays Bank Plc, as administrative agent (the “Administrative Agent”) and as collateral agent (the “Collateral Agent”) and
First-Citizens Bank & Trust Company as additional collateral agent (the “Additional Collateral Agent”). Under the 2023 ABL Facility, the ABL Borrower may draw up to $75.0 million under Revolving Credit Loans and LILO Loans. The 2023 ABL
Facility includes a $40.0 million accordion feature. In connection with the 2023 ABL Facility, Turning Point Brands contributed certain existing inventory to the ABL Borrower. The 2023 ABL Facility is secured on a first priority basis (subject to
customary exceptions) by all assets of the ABL Borrower.
The 2023 ABL Facility contains customary borrowing
conditions including a borrowing base equal to the sum of (a) the lesser of (1) 85% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL
Borrower and (B) 85% of the cost of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (2) 85% of the net orderly liquidation value (“NOLV”) percentage of the lower of (1)(A) or (1)(B); plus (b) 85% of the
face value of all eligible accounts of the ABL Borrower minus (c) the amount of all eligible reserves. The 2023 ABL Facility also includes a “last in last out” (“LILO”) borrowing base equal to the sum of (a) the lesser of: (1) 10% of the lower of
(A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) the cost of the sum of eligible inventory, plus eligible in-transit inventory and (2) 10% of the
NOLV percentage of the lower of (1)(A) or (1)(B); plus (b) 10% of the face amount of eligible account; minus (c) the amount of all eligible reserves.
Amounts borrowed under the 2023 ABL Facility are subject to
an interest rate margin per annum equal to (a) from and after the closing date until the last day of the first full fiscal quarter ended
after the closing date, (i) 1.25% per annum, in the case base rate loans, and (ii) 2.25% per annum, in the case of revolving credit loans that are SOFR Loans, (b)(i) 2.25% per annum, in the case of LILO loans that are base rate loans, and (ii)
3.25% per annum, in the case of LILO loans that are SOFR loans, (c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below based upon the historical excess availability for the
most recent fiscal quarter ended immediately prior to the relevant date, as calculated by the Administrative Agent.
|
Level
|
Historical Excess Availability
|
Applicable Margin
for SOFR Loans
|
Applicable Margin
for Base Rate Loans
|
|
I
|
Greater than or equal to 66.66%
|
1.75%
|
0.75%
|
|
II
|
Less than 66.66%, but greater than or equal to 33.33%
|
2.00%
|
1.00%
|
|
III
|
Less than 33.33%
|
2.25%
|
1.25%
|
The 2023 ABL Facility also requires the Company and its
restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters on or after the closing date if excess availability shall be less than the greater of (a) 12.5% of the line cap and (b) $9.375 million, at any time and continuing until excess availability is equal to or exceeds the greater of (i)
12.5% of the line and (ii) $9.375 million for thirty (30) consecutive calendar days; provided that such $9.375 million level shall automatically increase in proportion to the amount of any increase in the aggregate revolving credit commitments
thereunder in connection with any incremental facility.
The 2023 ABL Facility shall mature on the earlier of (x) November 7, 2027 and (y) the date that is 91 days prior to the maturity date
of any material debt of the ABL Borrower or the Company or any of its restricted subsidiaries (subject to customary extensions agreed by the lenders thereunder); provided that clause (y) shall not apply to the extent that on any applicable date
of determination (on any date prior to the date set forth in clause (y)), (A) the sum of (x) cash that is held in escrow for the repayment of such material debt pursuant to arrangements satisfactory to the Administrative Agent, (y) cash that is
held in accounts with the Administrative Agent and/or the Additional Collateral Agent, plus (z) excess availability, is sufficient to repay such material debt and (B) the ABL Borrower has excess availability of at least $15.0 million after giving
effect to such repayment of material debt, including any borrowings under the commitments in connection therewith.
Disclosure Pursuant to Item 1.02 of Current Report on Form 8-K – Termination of a Material Definitive Agreement.
On November 7, 2023, the Company terminated the 2021 Amended Revolving Credit Agreement in connection with the entry by one of its
subsidiaries into the new 2023 ABL Facility.
|
Exhibit No.
|
Description
|
|
Amendment No 1. Dated as of May 10, 2023, to the Credit Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., the obligors party thereto, Barclays Bank PLC, as
administrative agent, and the lenders party thereto (incorporated herein by reference to Exhibit 10.1 of Turning Point Brand, Inc’s Current Report on Form 8-K filed with the Commission on May 16, 2023 (File No. 001-37763).
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Rule 13a-14(a)/15d-14(a) Certification of Graham Purdy.*
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Rule 13a-14(a)/15d-14(a) Certification of Luis Reformina.*
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Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*
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Section 1350 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
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101
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XBRL (eXtensible Business Reporting Language). The following materials from Turning Point Brands, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, filed on
November 8, 2023, formatted in Inline XBRL (iXBRL): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, and (v) the
notes to consolidated financial statements.*
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104
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Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101).*
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Filed or furnished herewith
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TURNING POINT BRANDS, INC.
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By: /s/ Graham Purdy
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Name: Graham Purdy
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Title: President and Chief Executive Officer
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By: /s/ Luis Reformina
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Name: Luis Reformina
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Title: Chief Financial Officer
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By: /s/ Brian Wigginton
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Name: Brian Wigginton
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Title: Chief Accounting Officer
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Date: November 8, 2023
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