Turning Point Brands(TPB) - 2020 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements This section presents the unaudited consolidated financial statements and notes for the periods ended June 30, 2020, and December 31, 2019 Consolidated Balance Sheets This table presents the consolidated balance sheets for June 30, 2020, and December 31, 2019, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheets (June 30, 2020 vs. December 31, 2019) | ASSETS (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Cash | $64,192 | $95,250 | | Total current assets | $161,561 | $189,250 | | Total assets | $467,218 | $446,584 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | June 30, 2020 | December 31, 2019 | | Total current liabilities | $51,954 | $55,886 | | Notes payable and long-term debt | $284,624 | $268,951 | | Total liabilities | $355,476 | $339,999 | | Total stockholders' equity | $111,742 | $106,585 | | Total liabilities and stockholders' equity | $467,218 | $446,584 | Consolidated Statements of Income (Three Months Ended June 30, 2020 and 2019) This table presents the consolidated statements of income for the three months ended June 30, 2020, and 2019, showing net sales, gross profit, and net income Consolidated Statements of Income (Three Months Ended June 30) | (dollars in thousands except share data) | 2020 | 2019 | Change ($) | Change (%) | | :--------------------------------------- | :-------- | :-------- | :--------- | :--------- | | Net sales | $104,963 | $93,339 | $11,624 | 12.5% | | Cost of sales | $56,871 | $52,156 | $4,715 | 9.0% | | Gross profit | $48,092 | $41,183 | $6,909 | 16.8% | | Selling, general, and administrative expenses | $30,756 | $21,242 | $9,514 | 44.8% | | Operating income | $17,336 | $19,941 | $(2,605) | -13.1% | | Income before income taxes | $12,494 | $16,184 | $(3,690) | -22.8% | | Consolidated net income | $9,227 | $13,205 | $(3,978) | -30.1% | | Basic income per common share | $0.47 | $0.67 | $(0.20) | -29.9% | | Diluted income per common share | $0.47 | $0.66 | $(0.19) | -28.8% | Consolidated Statements of Income (Six Months Ended June 30, 2020 and 2019) This table presents the consolidated statements of income for the six months ended June 30, 2020, and 2019, showing net sales, gross profit, and net income Consolidated Statements of Income (Six Months Ended June 30) | (dollars in thousands except share data) | 2020 | 2019 | Change ($) | Change (%) | | :--------------------------------------- | :-------- | :-------- | :--------- | :--------- | | Net sales | $195,652 | $184,967 | $10,685 | 5.8% | | Cost of sales | $106,129 | $103,320 | $2,809 | 2.7% | | Gross profit | $89,523 | $81,647 | $7,876 | 9.6% | | Selling, general, and administrative expenses | $63,150 | $49,671 | $13,479 | 27.1% | | Operating income | $26,373 | $31,976 | $(5,603) | -17.5% | | Income before income taxes | $16,715 | $24,518 | $(7,803) | -31.8% | | Consolidated net income | $12,502 | $19,765 | $(7,263) | -36.7% | | Basic income per common share | $0.64 | $1.01 | $(0.37) | -36.6% | | Diluted income per common share | $0.63 | $0.99 | $(0.36) | -36.4% | Consolidated Statements of Comprehensive Income (Three and Six Months Ended June 30, 2020 and 2019) This section presents the consolidated statements of comprehensive income for the three and six months ended June 30, 2020, and 2019 Consolidated Statements of Comprehensive Income (Three Months Ended June 30) | (dollars in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :--------------------- | :------- | :------- | :--------- | :--------- | | Consolidated net income | $9,227 | $13,205 | $(3,978) | -30.1% | | Other comprehensive income (loss), net of tax | $80 | $(426) | $506 | -118.8% | | Consolidated comprehensive income | $9,307 | $12,779 | $(3,472) | -27.2% | Consolidated Statements of Comprehensive Income (Six Months Ended June 30) | (dollars in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :--------------------- | :------- | :------- | :--------- | :--------- | | Consolidated net income | $12,502 | $19,765 | $(7,263) | -36.7% | | Other comprehensive loss, net of tax | $(1,526) | $(504) | $(1,022) | 202.8% | | Consolidated comprehensive income | $10,976 | $19,261 | $(8,285) | -43.0% | Consolidated Statements of Cash Flows (Six Months Ended June 30, 2020 and 2019) This section presents the consolidated statements of cash flows for the six months ended June 30, 2020, and 2019, detailing operating, investing, and financing activities Consolidated Statements of Cash Flows (Six Months Ended June 30) | (dollars in thousands) | 2020 | 2019 | Change ($) | | :--------------------- | :-------- | :-------- | :--------- | | Net cash provided by operating activities | $17,534 | $21,698 | $(4,164) | | Net cash used in investing activities | $(39,728) | $(287) | $(39,441) | | Net cash used in financing activities | $(8,864) | $(20,913) | $12,049 | | Net increase (decrease) in cash | $(31,058) | $498 | $(31,556) | | Cash, beginning of period (Total) | $127,324 | $5,667 | $121,657 | | Cash, end of period (Total) | $96,266 | $6,165 | $90,101 | - Net cash provided by operating activities decreased by $4.2 million, primarily due to lower net income from PMTA expenses, partially offset by increased amortization of debt discount and deferred financing costs[197] - Net cash used in investing activities increased significantly by $39.4 million, mainly due to the acquisition of certain assets from Durfort[198] - Net cash used in financing activities decreased by $12.0 million, primarily due to the payment of the revolving credit facility and second lien term loan in 2019[199] Consolidated Statements of Changes in Stockholder's Equity (Deficit) (Three Months Ended June 30, 2020 and 2019) This table presents changes in stockholders' equity for the three months ended June 30, 2020, including net income and share repurchases Changes in Stockholders' Equity (Three Months Ended June 30, 2020) | (dollars in thousands) | Common Stock, Voting | Additional Paid-In Capital | Cost of Repurchased Common Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | | :--------------------- | :------------------- | :------------------------- | :------------------------------- | :----------------------------------- | :------------------ | :------ | | Beginning balance April 1, 2020 | $197 | $126,151 | $(2,627) | $(5,379) | $(13,031) | $105,311 | | Net income | - | - | - | - | $9,227 | $9,227 | | Cost of repurchased common stock | - | - | $(2,662) | - | - | $(2,662) | | Ending balance June 30, 2020 | $197 | $126,928 | $(5,289) | $(5,299) | $(4,795) | $111,742 | Consolidated Statements of Changes in Stockholder's Equity (Deficit) (Six Months Ended June 30, 2020 and 2019) This table presents changes in stockholders' equity for the six months ended June 30, 2020, including net income and share repurchases Changes in Stockholders' Equity (Six Months Ended June 30, 2020) | (dollars in thousands) | Common Stock, Voting | Additional Paid-In Capital | Cost of Repurchased Common Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | | :--------------------- | :------------------- | :------------------------- | :------------------------------- | :----------------------------------- | :------------------ | :------ | | Beginning balance January 1, 2020 | $197 | $125,469 | $- | $(3,773) | $(15,308) | $106,585 | | Net income | - | - | - | - | $12,502 | $12,502 | | Cost of repurchased common stock | - | - | $(5,289) | - | - | $(5,289) | | Ending balance June 30, 2020 | $197 | $126,928 | $(5,289) | $(5,299) | $(4,795) | $111,742 | Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, explaining accounting policies, acquisitions, debt, and other financial disclosures Note 1. Organizations and Basis of Presentation Turning Point Brands, Inc. is a holding company with various subsidiaries across different product segments. The unaudited interim consolidated financial statements are prepared in accordance with GAAP, including all necessary adjustments for fair presentation, and should be read in conjunction with the 2019 annual financial statements - The Company is a holding company owning subsidiaries like North Atlantic Trading Company, Inc. (NATC) and Turning Point Brands, LLC (TPLLC), which encompass various tobacco and NewGen product brands[27] - Unaudited interim consolidated financial statements are prepared in accordance with GAAP, including all necessary normal and recurring adjustments, and are not necessarily indicative of full-year results[28] Note 2. Summary of Significant Accounting Policies This note details the company's significant accounting policies, including revenue recognition, derivative instruments, and risks related to tobacco regulation - Revenue is recognized upon delivery of goods, net of discounts, returns, and incentives, following a five-step analysis under Topic 606[31] - The company uses foreign currency forward contracts to hedge inventory purchase commitments and interest rate swap agreements to manage interest rate risk, with qualifying hedges adjusted to fair value through other comprehensive income[36][37] - The tobacco industry faces significant regulatory risks, including potential flavor bans for vapor products, ongoing FDA regulations (e.g., PMTA deadlines), and product liability litigation[38][39] - The company maintains a Master Settlement Agreement (MSA) escrow account, with deposits totaling $32.1 million as of June 30, 2020, though it no longer sells MSA-covered products since Q3 2017[40][43] - The FDA's premarket tobacco product application (PMTA) deadline for 'new tobacco products' was extended to September 9, 2020, due to COVID-19, requiring applications for continued marketing[51][53] Note 3. Acquisitions The company completed two acquisitions: Durfort Holdings in June 2020 for $47.8 million, acquiring co-ownership in HTL cigar wraps and an exclusive distribution agreement, and Solace Technologies in July 2019 for $9.4 million, enhancing its Nu-X product development capabilities - In June 2020, the Company acquired certain tobacco assets and distribution rights from Durfort Holdings S.R.L. and Blunt Wrap USA for $47.8 million, gaining co-ownership of HTL cigar wraps and an exclusive Master Distribution Agreement for Blunt Wrap® cigar wraps in the USA[58] - In July 2019, the Company purchased Solace Technologies for $9.4 million, aiming to integrate its innovative product development and e-liquid brands into the Nu-X development engine[60] Note 4. Derivative Instruments The company uses foreign currency forward contracts to hedge inventory purchase commitments and interest rate swap agreements to manage interest rate risk. As of June 30, 2020, interest rate swap agreements for a notional amount of $70 million resulted in a liability of $4.7 million - The Company manages foreign exchange rate risks by hedging up to 100% of anticipated inventory purchases over a 12-month period and up to 90% of non-inventory purchases[62] - Interest rate swap agreements, with a notional amount of $70 million expiring December 2022, fix LIBOR at 2.755% and resulted in a liability of $4.7 million at June 30, 2020 (vs. $2.5 million at December 31, 2019)[63] Note 5. Fair Value of Financial Instruments The fair values of cash, accounts receivable, and the 2018 Revolving Credit Facility approximate their carrying values due to their short-term nature or variable interest rates. The 2018 First Lien Term Loan's fair value was $141.0 million at June 30, 2020, while Convertible Senior Notes had a fair value of $143.1 million against a carrying value of $172.5 million. Interest rate swaps resulted in a $4.7 million liability - Fair values of cash, accounts receivable, and the 2018 Revolving Credit Facility approximate their carrying values[66][67][68] Fair Value of Long-Term Debt and Interest Rate Swaps (in thousands) | Instrument | June 30, 2020 (Fair Value) | December 31, 2019 (Fair Value) | June 30, 2020 (Carrying Value) | December 31, 2019 (Carrying Value) | | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | 2018 First Lien Term Loan | ~$141,000 | ~$146,000 | N/A | N/A | | Convertible Senior Notes | ~$143,100 | ~$140,100 | $172,500 | $172,500 | | Promissory Note | ~$10,000 | N/A | $10,000 | N/A | | Unsecured Loan | ~$7,485 | N/A | $7,485 | N/A | | Interest Rate Swaps (liability) | $4,700 | $2,500 | N/A | N/A | Note 6. Inventories Net inventory increased to $75.6 million at June 30, 2020, from $71.0 million at December 31, 2019, primarily driven by an increase in leaf tobacco and NewGen finished goods. The inventory valuation allowance decreased to $18.6 million Inventory Components (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :------------------------- | :------------ | :---------------- | | Raw materials and work in process | $7,552 | $7,050 | | Leaf tobacco | $38,550 | $32,763 | | Finished goods - Smokeless products | $5,595 | $5,680 | | Finished goods - Smoking products | $7,902 | $13,138 | | Finished goods - NewGen products | $20,972 | $17,111 | | Other | $581 | $989 | | Gross Inventory | $81,152 | $76,731 | | LIFO reserve | $(5,596) | $(5,752) | | Net Inventory | $75,556 | $70,979 | - The inventory valuation allowance decreased from $21.5 million at December 31, 2019, to $18.6 million at June 30, 2020[76] Note 7. Other Current Assets Other current assets increased to $16.7 million at June 30, 2020, from $16.1 million at December 31, 2019, primarily due to higher inventory deposits and other assets, partially offset by lower prepaid taxes Other Current Assets (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :---------------- | :------------ | :---------------- | | Inventory deposits | $5,445 | $4,012 | | Prepaid taxes | $1,189 | $3,673 | | Other | $10,067 | $8,430 | | Total | $16,701 | $16,115 | Note 8. Property, Plant, and Equipment Net property, plant, and equipment decreased slightly to $13.3 million at June 30, 2020, from $13.8 million at December 31, 2019, mainly due to accumulated depreciation Property, Plant, and Equipment (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :------------------------- | :------------ | :---------------- | | Gross property, plant and equipment | $29,246 | $28,262 | | Accumulated depreciation | $(15,903) | $(14,446) | | Net property, plant and equipment | $13,343 | $13,816 | Note 9. Other Assets Other assets increased to $11.5 million at June 30, 2020, from $10.7 million at December 31, 2019, driven by increases in pension assets and other miscellaneous assets. In July 2019, the Company acquired a 30% stake in Canadian distribution entity ReCreation Marketing for $1.0 million Other Assets (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :---------------- | :------------ | :---------------- | | Equity investments | $5,421 | $5,421 | | Pension assets | $1,820 | $1,686 | | Other | $4,271 | $3,566 | | Total | $11,512 | $10,673 | - In July 2019, the Company obtained a 30% stake in Canadian distribution entity, ReCreation Marketing, for $1.0 million, with options to acquire up to 50% ownership[80] Note 10. Accrued Liabilities Accrued liabilities decreased slightly to $25.6 million at June 30, 2020, from $26.5 million at December 31, 2019, mainly due to decreases in accrued payroll and customer returns, partially offset by higher taxes payable and lease liabilities Accrued Liabilities (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :---------------------------- | :------------ | :---------------- | | Accrued payroll and related items | $4,206 | $5,267 | | Customer returns and allowances | $5,446 | $6,160 | | Taxes payable | $2,480 | $705 | | Lease liabilities | $2,627 | $2,218 | | Accrued interest | $2,057 | $1,909 | | Other | $8,777 | $10,261 | | Total | $25,593 | $26,520 | Note 11. Notes Payable and Long-Term Debt Total notes payable and long-term debt, net of deferred finance charges and debt discount, increased to $284.6 million at June 30, 2020, from $269.0 million at December 31, 2019. This increase is primarily due to the issuance of a $10.0 million Promissory Note for the Durfort acquisition and a $7.5 million Unsecured Loan under the CARES Act, partially offset by payments on the 2018 First Lien Term Loan and the maturity of the IVG Note Notes Payable and Long-Term Debt (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :---------------------------- | :------------ | :---------------- | | 2018 First Lien Term Loan | $141,000 | $146,000 | | Convertible Senior Notes | $172,500 | $172,500 | | Note payable - Promissory Note | $10,000 | $- | | Note payable - Unsecured Loan | $7,485 | $- | | Note payable - IVG | $- | $4,240 | | Gross notes payable and long-term debt | $330,985 | $322,740 | | Less deferred finance charges | $(5,778) | $(6,466) | | Less debt discount | $(28,583) | $(32,083) | | Less current maturities | $(12,000) | $(15,240) | | Notes payable and long-term debt | $284,624 | $268,951 | - The 2018 First Lien Term Loan has quarterly payments increasing to $3.0 million on June 30, 2020, and has a maturity date of March 7, 2023[85] - Convertible Senior Notes, issued in July 2019 for $172.5 million, bear 2.50% interest and mature on July 15, 2024. They are convertible into approximately 3,202,808 shares of common stock at a conversion price of $53.86 per share[87][88] - A $10.0 million Promissory Note was issued in June 2020 for the Durfort acquisition, with a 7.5% annual interest rate and principal payable in two installments[92] - A $7.5 million unsecured loan was obtained in April 2020 under the CARES Act, with a 1.00% interest rate and maturity on April 17, 2022[93] Note 12. Leases The company adopted ASU 2016-02, recognizing lease liabilities and right-of-use assets for its operating leases, which primarily cover manufacturing, office, and retail spaces. As of June 30, 2020, total lease liabilities were $14.4 million and right-of-use assets were $13.2 million. The weighted-average remaining lease term is 7.6 years with a discount rate of 5.65% - The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, leading to the recognition of lease liabilities and right-of-use assets on the balance sheet for leases primarily related to property and vehicles[95] Lease Assets and Liabilities (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :---------------- | :------------ | :---------------- | | Right of use assets | $13,243 | $12,130 | | Total lease assets | $13,243 | $12,130 | | Current lease liabilities | $2,627 | $2,218 | | Long-term lease liabilities | $11,813 | $11,067 | | Total lease liabilities | $14,440 | $13,285 | - As of June 30, 2020, the weighted-average remaining lease term for operating leases was 7.6 years, with a weighted-average discount rate of 5.65%[100] Note 13. Income Taxes The company's effective income tax rate for the three and six months ended June 30, 2020, was 26.1% and 25.2%, respectively, compared to 18.4% and 19.4% for the same periods in 2019. The 2019 rates included significant discrete tax deductions from stock option exercises Effective Income Tax Rates | Period | 2020 Effective Tax Rate | 2019 Effective Tax Rate | | :------------------------- | :---------------------- | :---------------------- | | Three Months Ended June 30 | 26.1% | 18.4% | | Six Months Ended June 30 | 25.2% | 19.4% | - The 2019 effective tax rates included discrete tax deductions of $3.7 million (three months) and $4.5 million (six months) related to stock option exercises, which were significantly higher than the $0.0 million and $0.9 million in 2020[102] Note 14. Pension and Postretirement Benefit Plans The company's defined benefit pension plan was frozen and is being terminated, with final distributions expected in 2020. The defined benefit postretirement plan, which provided medical and dental benefits, was amended to cease benefits effective June 30, 2020 - The defined benefit pension plan was frozen and is in the process of termination, with final distributions anticipated in 2020[104] - The defined benefit postretirement plan, covering hourly employees for medical and dental benefits, was amended to cease benefits effective June 30, 2020[105] Note 15. Share Incentive Plans The company operates under the 2015 Equity Incentive Plan, with 330,430 shares available for grant as of June 30, 2020. Total unrecognized compensation expense for options is $1.2 million, to be expensed over 1.90 years, and for Performance-Based Restricted Stock Units (PRSUs) is $9.8 million, to be expensed over service periods based on performance probability - As of June 30, 2020, 330,430 shares are available for grant under the 2015 Equity Incentive Plan[107] Stock Option Activity (Six Months Ended June 30) | Category | 2020 Shares | 2019 Shares | | :------------------------ | :---------- | :---------- | | Outstanding, December 31 | 696,716 | 659,574 | | Granted | 155,000 | 180,780 | | Exercised | (43,354) | (129,067) | | Forfeited | (1,289) | (14,571) | | Outstanding, June 30 | 807,073 | 696,716 | - Total unrecognized compensation expense for stock options is $1.2 million, to be expensed over 1.90 years[113] - Total unrecognized compensation expense for Performance-Based Restricted Stock Units (PRSUs) is $9.8 million, to be expensed over service periods based on the probability of achieving performance conditions[115] Note 16. Contingencies The company is subject to various legal proceedings, including product liability claims related to malfunctioning vaporizer devices or e-liquid consumption, and a lawsuit from a franchisee alleging disclosure failures. The company believes it has strong defenses and expects to use financial 'hold-backs' from vapor business acquisitions to cover litigation expenses - The Company is a defendant in product liability claims alleging personal injuries from malfunctioning vaporizer devices or e-liquid consumption, and may face future claims related to other NewGen products[117] - A subsidiary is a defendant in a lawsuit brought by a franchisee seeking damages and rescission, alleging failure to make certain disclosures. The Company believes it has valid defenses and that the franchisee is bound by an arbitration agreement[119] - Subsidiaries involved in vapor products are subject to information requests and potential regulatory lawsuits regarding marketing practices and underage sales, with financial 'hold-backs' from acquisitions expected to defray associated expenses[120] Note 17. Income Per Share Basic and diluted EPS for the three months ended June 30, 2020, were $0.47, down from $0.67 and $0.66 respectively in 2019. For the six months, basic EPS was $0.64 (down from $1.01) and diluted EPS was $0.63 (down from $0.99). The Convertible Senior Notes were excluded from diluted EPS calculations as the stock price did not exceed the conversion price Income Per Share (Three Months Ended June 30) | EPS Type | 2020 | 2019 | Change ($) | Change (%) | | :------- | :---- | :---- | :--------- | :--------- | | Basic | $0.47 | $0.67 | $(0.20) | -29.9% | | Diluted | $0.47 | $0.66 | $(0.19) | -28.8% | Income Per Share (Six Months Ended June 30) | EPS Type | 2020 | 2019 | Change ($) | Change (%) | | :------- | :---- | :---- | :--------- | :--------- | | Basic | $0.64 | $1.01 | $(0.37) | -36.6% | | Diluted | $0.63 | $0.99 | $(0.36) | -36.4% | - The 3,202,808 shares issuable upon conversion of Convertible Senior Notes were excluded from diluted EPS calculations for both periods in 2020 because the average stock price did not exceed the conversion price of $53.86[121] Note 18. Segment Information The company operates in three reportable segments: Smokeless products, Smoking products, and NewGen products. For the three months ended June 30, 2020, all segments saw net sales and gross profit increases, with NewGen products showing strong B2C online growth. For the six months, Smokeless and Smoking products grew, while NewGen sales decreased due to the discontinuance of V2 - The Company has three reportable segments: Smokeless products (moist snuff, chewing tobacco), Smoking products (cigarette papers, cigars, MYO cigar wraps, pipe tobaccos), and NewGen products (e-cigarettes, e-liquids, vaporizers, CBD products)[122] Segment Net Sales (Three Months Ended June 30, in thousands) | Segment | 2020 | 2019 | Change ($) | Change (%) | | :---------------- | :-------- | :-------- | :--------- | :--------- | | Smokeless products | $30,822 | $26,176 | $4,646 | 17.7% | | Smoking products | $27,403 | $25,363 | $2,040 | 8.0% | | NewGen products | $46,738 | $41,800 | $4,938 | 11.8% | | Total | $104,963 | $93,339 | $11,624 | 12.5% | Segment Net Sales (Six Months Ended June 30, in thousands) | Segment | 2020 | 2019 | Change ($) | Change (%) | | :---------------- | :-------- | :-------- | :--------- | :--------- | | Smokeless products | $57,317 | $48,720 | $8,597 | 17.6% | | Smoking products | $56,317 | $50,882 | $5,435 | 10.7% | | NewGen products | $82,018 | $85,365 | $(3,347) | -3.9% | | Total | $195,652 | $184,967 | $10,685 | 5.8% | NewGen Segment Revenue Disaggregation by Sales Channel (Three Months Ended June 30, in thousands) | Sales Channel | 2020 | 2019 | Change ($) | Change (%) | | :------------------------ | :-------- | :-------- | :--------- | :--------- | | Business to Business | $30,368 | $30,737 | $(369) | -1.2% | | Business to Consumer - Online | $15,052 | $8,466 | $6,586 | 77.8% | | Business to Consumer - Corporate store | $1,318 | $2,566 | $(1,248) | -48.6% | | Other | $- | $31 | $(31) | -100.0% | | Total | $46,738 | $41,800 | $4,938 | 11.8% | Note 19. Dividends and Share Repurchase The company paid a dividend of $0.05 per common share on July 10, 2020. The Board of Directors approved a $50.0 million share repurchase authorization on February 25, 2020, leading to the repurchase of 256,863 shares for $5.3 million during the six months ended June 30, 2020 - A dividend of $0.05 per common share was paid on July 10, 2020[134] - The Board approved a $50.0 million share repurchase authorization on February 25, 2020[136] - For the six months ended June 30, 2020, 256,863 shares were repurchased for a total cost of $5.3 million, at an average price of $20.59 per share[136] Note 20. Subsequent Events On July 16, 2020, the company completed its merger with Standard Diversified Inc. (SDI), resulting in SDI's shareholders receiving TPB Voting Common Stock and the retirement of 245,234 shares of TPB Common Stock. This reorganization eliminated the controlling holding company structure and improved public float - On July 16, 2020, the Company completed a tax-free downstream merger with Standard Diversified Inc. (SDI)[137] - SDI shareholders received TPB Voting Common Stock at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock[137] - The merger eliminated the controlling shareholder structure, improved public float, and resulted in the retirement of 245,234 shares of TPB Common Stock[137][154] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, key factors, recent developments, and liquidity for the periods ended June 30, 2020, and 2019 Organizational Structure This section describes the company's organizational structure, including its holding company status and key subsidiaries - Turning Point Brands, Inc. is a holding company with subsidiaries including North Atlantic Trading Company, Inc. (NATC) and Turning Point Brands, LLC (TPLLC), which manage various product lines and operations[140] Overview This section provides an overview of the company's position as a leading provider of Other Tobacco Products (OTP) and adult consumer alternatives - The Company is a leading, independent provider of Other Tobacco Products (OTP) and adult consumer alternatives, operating in Smokeless, Smoking, and NewGen product segments[141] - The OTP industry generated approximately $11.5 billion in manufacturer revenue in 2019 and is experiencing low to mid-single digit consumer unit growth, contrasting with declining manufactured cigarette volumes[141] - The Company established Nu-X in January 2019 for alternative product development and has expanded through acquisitions like Solace Technology and a stake in ReCreation Marketing to leverage expertise in the growing alternatives market[142] Products This section details the company's product segments, including Smokeless, Smoking, and NewGen products - The Smokeless products segment includes moist snuff and loose leaf chewing tobacco (e.g., Stoker's®)[144] - The Smoking products segment markets cigarette papers, tubes, finished cigars, MYO cigar wraps (e.g., Zig-Zag®), and traditional pipe tobaccos[144] - The NewGen products segment distributes CBD, liquid vapor products, e-cigarettes, and other non-tobacco/nicotine products through various channels (e.g., VaporBeast®, VaporFi®, Solace©)[144] Operations This section describes the company's operational model, including revenue generation channels and outsourced production - The core tobacco business (Smokeless and Smoking segments) primarily generates revenue from sales to wholesale distributors, while NewGen products are sold directly to non-traditional retail outlets and consumers via e-commerce[145] - Over 80% of the company's production, by net sales, is outsourced to third-party suppliers, with in-house production limited to moist snuff tobacco and proprietary e-liquids[146] Key Factors Affecting Our Results of Operations This section outlines key factors influencing the company's operational results, such as market penetration, new products, and regulatory costs - Key factors include market penetration, new product introductions, declining interest in some tobacco products, price sensitivity, marketing initiatives, economic conditions, regulation costs (e.g., 'deeming regulations'), counterfeit products, currency fluctuations, and acquisition strategies[147] Recent Developments This section details recent developments, including the Durfort acquisition, COVID-19 impact, SDI reorganization, and PMTA deadline extension Durfort Holdings In June 2020, the company acquired tobacco assets and distribution rights from Durfort Holdings S.R.L. and Blunt Wrap USA for $47.8 million, gaining co-ownership of HTL cigar wraps and an exclusive distribution agreement for Blunt Wrap® cigar wraps in the USA - In June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. and Blunt Wrap USA for $47.8 million, comprising $37.8 million in cash and a $10.0 million Promissory Note[148] - This acquisition included co-ownership in intellectual property rights for HTL cigar wraps and cones, and an exclusive Master Distribution Agreement for Blunt Wrap® cigar wraps in the USA[148] COVID-19 Impact The COVID-19 pandemic led to enhanced safety measures and increased operational costs in manufacturing, temporary wage increases, and a shift in production to hand sanitizers. While in-person selling was dampened and some price increases delayed, B2C online platforms experienced elevated sales and market share gains. Supply chain disruptions included a temporary shutdown of a cigar wrap manufacturer - The Company implemented enhanced safety measures in operations, including split shifts, temperature scans, protective equipment, and increased cleaning, leading to higher operational costs[149] - COVID-19 led to increased demand, requiring additional employees and temporary wage increases for hourly staff, and a shift in production capacity to manufacture hand sanitizers[151] - The pandemic dampened in-person selling and delayed budgeted price increases, but B2C platforms saw elevated sales and market share gains due to consumer shifts to online purchasing[152] Standard Diversified Inc. ("SDI") Reorganization On July 16, 2020, the company completed a tax-free merger with SDI, where SDI shareholders received TPB common stock. This reorganization eliminated the controlling holding company structure, improved public float, and retired 245,234 shares of TPB Common Stock - On July 16, 2020, the Company completed a tax-free downstream merger with SDI, where SDI shareholders received TPB Voting Common Stock[154] - The reorganization eliminated the controlling holding company structure, significantly improved the public float of shares outstanding, and resulted in the retirement of 245,234 shares of TPB Common Stock[154] Premarket Tobacco Application Deadline Extension The FDA extended the premarket tobacco application (PMTA) deadline for many e-cigarettes, cigars, and other tobacco products by 120 days, from May 12, 2020, to September 9, 2020, citing impacts from the COVID-19 pandemic - The FDA extended the premarket tobacco application (PMTA) deadline for e-cigarettes, cigars, and other tobacco products by 120 days, moving it from May 12, 2020, to September 9, 2020[155] - This extension was granted due to the impacts of the worldwide COVID-19 pandemic on both the FDA and the industry[155] Critical Accounting Policies and Uses of Estimates This section confirms no material changes to critical accounting policies and estimates since the 2019 Annual Report on Form 10-K - There have been no material changes to the critical accounting policies and estimates since the 2019 Annual Report on Form 10-K[156] Recent Accounting Pronouncements This section refers to Note 2 for a description of recently issued and adopted accounting pronouncements - Refer to Note 2, 'Summary of Significant Accounting Policies', for a description of recently issued accounting pronouncements, including those recently adopted[157] Results of Operations This section provides a detailed comparison of the company's financial results for the three and six months ended June 30, 2020, versus 2019 Comparison of the Three Months Ended June 30, 2020, to the Three Months Ended June 30, 2019 For the three months ended June 30, 2020, consolidated net sales increased by 12.5% to $105.0 million, driven by volume growth across all segments. Gross profit rose by 16.8% to $48.1 million, with gross margin improving to 45.8%. However, operating income decreased by 13.1% to $17.3 million, and consolidated net income fell by 30.1% to $9.2 million, primarily due to a 44.8% increase in SG&A expenses, including PMTA-related costs, and higher interest expense Consolidated Results of Operations (Three Months Ended June 30, in thousands) | Metric | 2020 | 2019 | % Change | | :--------------------------------------- | :-------- | :-------- | :------- | | Net sales | $104,963 | $93,339 | 12.5% | | Gross profit | $48,092 | $41,183 | 16.8% | | Selling, general, and administrative expenses | $30,756 | $21,242 | 44.8% | | Operating income | $17,336 | $19,941 | -13.1% | | Consolidated net income | $9,227 | $13,205 | -30.1% | - Smokeless products net sales increased 17.7% to $30.8 million, driven by 13.9% volume growth and 3.8% price/mix increase, primarily from Stoker's® MST[160] - Smoking products net sales increased 8.0% to $27.4 million, due to double-digit growth in US and Canada rolling papers, partially offset by a $2.4 million decline in MYO cigar wraps due to COVID-19 supply disruption[161] - NewGen products net sales increased 11.8% to $46.7 million, driven by strong market share gains in vape distribution and contributions from Solace and Nu-X products[162] - SG&A expenses increased by $9.5 million (44.8%), including $3.3 million for PMTA-related expenses, $0.8 million for stock options/incentives, and $0.3 million for transaction expenses, partially offset by a $5.5 million VMR settlement gain in 2019[168] Comparison of the Six Months Ended June 30, 2020, to the Six Months Ended June 30, 2019 For the six months ended June 30, 2020, consolidated net sales increased by 5.8% to $195.7 million, primarily from growth in Smokeless and Smoking segments. Gross profit increased by 9.6% to $89.5 million, with gross margin at 45.8%. However, operating income decreased by 17.5% to $26.4 million, and consolidated net income fell by 36.7% to $12.5 million, mainly due to a 27.1% increase in SG&A expenses, including $9.2 million for PMTA-related costs, and higher interest expense Consolidated Results of Operations (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | % Change | | :--------------------------------------- | :-------- | :-------- | :------- | | Net sales | $195,652 | $184,967 | 5.8% | | Gross profit | $89,523 | $81,647 | 9.6% | | Selling, general, and administrative expenses | $63,150 | $49,671 | 27.1% | | Operating income | $26,373 | $31,976 | -17.5% | | Consolidated net income | $12,502 | $19,765 | -36.7% | - Smokeless products net sales increased 17.6% to $57.3 million, driven by 15.2% volume growth of Stoker's® MST[174] - Smoking products net sales increased 10.7% to $56.3 million, due to double-digit growth in US and Canada papers[175] - NewGen products net sales decreased 3.9% to $82.0 million, primarily due to the discontinuance of V2 at the end of Q2 2019[176] - SG&A expenses increased by $13.5 million (27.1%), including $9.2 million for PMTA-related expenses, $1.2 million for stock options/incentives, and $1.3 million for transaction expenses, partially offset by a $5.5 million VMR settlement gain in 2019[181] EBITDA and Adjusted EBITDA The company uses non-GAAP measures EBITDA and Adjusted EBITDA to assess operating performance and for financial covenants. For the three months ended June 30, 2020, Adjusted EBITDA increased by 24.8% to $22.8 million. For the six months ended June 30, 2020, Adjusted EBITDA increased by 18.2% to $40.6 million, primarily due to the exclusion of FDA PMTA costs and other non-recurring items - EBITDA and Adjusted EBITDA are non-GAAP financial measures used by management and investors to evaluate operating performance and for credit agreement financial covenants[186] EBITDA and Adjusted EBITDA (Three Months Ended June 30, in thousands) | Metric | 2020 | 2019 | % Change | | :--------------- | :-------- | :-------- | :------- | | Consolidated net income | $9,227 | $13,205 | -30.1% | | EBITDA | $18,698 | $21,066 | -11.3% | | Adjusted EBITDA | $22,778 | $18,252 | 24.8% | EBITDA and Adjusted EBITDA (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | % Change | | :--------------- | :-------- | :-------- | :------- | | Consolidated net income | $12,502 | $19,765 | -36.7% | | EBITDA | $29,189 | $34,146 | -14.5% | | Adjusted EBITDA | $40,560 | $34,324 | 18.2% | - Adjusted EBITDA for the six months ended June 30, 2020, includes $9.164 million in FDA PMTA costs as an add-back, which were not present in 2019[192] Liquidity and Capital Reserves The company's liquidity is supported by cash flows from operations and $46.4 million available under its 2018 Revolving Credit Facility as of June 30, 2020. Working capital decreased by $23.8 million to $109.6 million, mainly due to the Durfort acquisition. Net cash provided by operating activities decreased, while net cash used in investing activities significantly increased due to acquisitions. Net cash used in financing activities decreased due to lower debt payments. The company remains in compliance with debt covenants and has increased long-term debt due to new notes - The Company believes its cash flows from operations and $46.4 million availability under the 2018 Revolving Credit Facility are adequate for foreseeable operating cash requirements[194][206] Working Capital (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------- | :------------ | :---------------- | | Current assets | $161,561 | $189,250 | | Current liabilities | $51,954 | $55,886 | | Working capital | $109,607 | $133,364 | - Working capital decreased by $23.8 million, primarily due to a decrease in cash resulting from the June 2020 Durfort acquisition[195] - The Company was in compliance with the financial and restrictive covenants of the 2018 Credit Facility as of June 30, 2020[202] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's market risk disclosures indicate no material changes in foreign currency or credit risk exposure since the 2019 Annual Report. Interest rate sensitivity primarily relates to variable-rate loans under the 2018 Credit Facility, though swap contracts mitigate some risk. Fixed-rate Convertible Senior Notes are not subject to interest rate volatility, but their fair value can fluctuate with stock price and market interest rates - No material changes in foreign currency exchange rate fluctuation risk or credit risk exposure were reported since the 2019 Annual Report on Form 10-K[218][219] - Interest rate sensitivity primarily stems from variable-rate loans under the 2018 Credit Facility, but swap contracts for a $70 million notional amount mitigate this risk. A 1% increase in interest rates would change pre-tax income by approximately $0.7 million per year[220] - The $172.5 million Convertible Senior Notes bear a fixed interest rate, eliminating direct financial statement risk from interest rate changes, but their fair value is sensitive to fluctuations in the company's stock price and market interest rates[221] Item 4. Controls and Procedures Management, including the CEO, CFO, and CAO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely. No material changes to internal control over financial reporting occurred during the quarter - Management, including the CEO, CFO, and CAO, concluded that disclosure controls and procedures were effective as of June 30, 2020[222] - These controls provide reasonable assurance that information required for SEC reports is recorded, processed, summarized, and reported within specified time periods and communicated to management for timely decisions[222] - There have been no material changes in the company's internal control over financial reporting during the fiscal quarter ended June 30, 2020[223] PART II—OTHER INFORMATION This part provides other information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, including product liability claims related to malfunctioning vaporizer devices or e-liquid consumption, and a lawsuit from a franchisee alleging disclosure failures. While the company believes it has strong defenses, there is no assurance of prevailing, and these cases could materially affect its financial position or results of operations. The company expects to use financial 'hold-backs' from vapor business acquisitions to cover litigation expenses - The Company is a defendant in product liability claims alleging personal injuries from malfunctioning vaporizer devices or e-liquid consumption[226] - A subsidiary is involved in a lawsuit brought by a franchisee seeking damages and rescission, alleging failure to make certain disclosures in the Franchise Disclosure Document[227] - The Company's vapor product subsidiaries are subject to information requests and potential regulatory lawsuits, with financial 'hold-backs' from vapor business acquisitions expected to defray associated expenses[228] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2019 Annual Report on Form 10-K - No material changes to the Risk Factors set forth in the 2019 Annual Report on Form 10-K have occurred[230] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report during the period Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period Item 4. Mine Safety Disclosures This item is not applicable for the reporting period Item 5. Other Information There is no other information to report under this item Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including the Agreement and Plan of Merger and Reorganization, the Third Amendment to the First Lien Credit Agreement, various certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and XBRL formatted financial data - Exhibits include the Agreement and Plan of Merger and Reorganization (Exhibit 2.1), the Third Amendment to the First Lien Credit Agreement (Exhibit 10.1), and various certifications (Exhibits 31.1, 31.2, 31.3, 32.1)[235] - The report also includes XBRL (eXtensible Business Reporting Language) formatted financial statements and notes, along with the Cover Page Interactive Data File[235] Signatures The Quarterly Report on Form 10-Q was duly signed on behalf of Turning Point Brands, Inc. by its President and Chief Executive Officer, Lawrence S. Wexler, Chief Financial Officer, Robert Lavan, and Chief Accounting Officer, Brian Wigginton, on July 28, 2020 - The report was signed by Lawrence S. Wexler (President and CEO), Robert Lavan (CFO), and Brian Wigginton (CAO) on July 28, 2020[238]