Turning Point Brands(TPB) - 2023 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Turning Point Brands, Inc. as of June 30, 2023, and for the three and six-month periods then ended, compared to the prior year. For the six months ended June 30, 2023, the company reported net sales of $206.6 million and net income of $17.1 million. Total assets decreased slightly to $559.7 million from $572.1 million at year-end 2022, while total liabilities also decreased, leading to an increase in stockholders' equity to $129.2 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $251,699 | $257,654 | | Total Assets | $559,674 | $572,106 | | Total Current Liabilities | $41,705 | $41,376 | | Total Liabilities | $430,428 | $458,726 | | Total Stockholders' Equity | $129,246 | $113,380 | Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $105,595 | $102,925 | $206,551 | $203,819 | | Gross Profit | $52,478 | $51,469 | $101,095 | $103,263 | | Operating Income | $20,545 | $18,146 | $38,387 | $37,375 | | Consolidated Net Income | $9,708 | $5,206 | $17,050 | $15,977 | | Diluted EPS | $0.53 | $0.30 | $0.94 | $0.86 | Consolidated Cash Flow Highlights (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $27,533 | $7,149 | | Net cash used in investing activities | $(2,990) | $(15,709) | | Net cash used in financing activities | $(30,431) | $(22,507) | | Net decrease in cash | $(5,888) | $(31,067) | Notes to Consolidated Financial Statements Provides detailed explanations of the accounting policies and financial data presented in the consolidated financial statements, including three operating segments, FDA regulatory risks, $379.2 million in long-term debt, a proposed $5.0 million legal settlement, and segment performance breakdowns - The company operates in three segments: (i) Zig-Zag Products, (ii) Stoker's Products, and (iii) Creative Distribution Solutions. Its products are available in over 217,000 retail outlets in North America[25] - The company faces significant regulation from the FDA, which now has jurisdiction over tobacco-derived and non-tobacco nicotine products. The company has submitted Premarket Tobacco Applications (PMTAs) for certain products to remain on the market, but there is no guarantee of approval[46][47][48] - The company has discontinued product lines covered by the Master Settlement Agreement (MSA) and is not required to make future escrow deposits. As of June 30, 2023, the fair value of funds in the MSA escrow account was $28.2 million[39] - In Q2 2023, the company recorded an impairment loss of $3.8 million on its investment in Docklight Brands, bringing the fair value to zero. This followed a $4.9 million impairment in Q1 2023[70] - A proposed settlement was reached in a stockholder lawsuit, where defendants' insurers will pay $5.0 million into an escrow account. After legal fees (up to $1.5 million), the remaining funds will be paid to the company. The settlement is subject to court approval[113] Segment Net Sales (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Zig-Zag products | $46,722 | $46,226 | $88,609 | $91,898 | | Stoker's products | $36,056 | $33,588 | $69,718 | $65,291 | | Creative Distribution Solutions | $22,817 | $23,111 | $48,224 | $46,630 | | Total | $105,595 | $102,925 | $206,551 | $203,819 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the three and six months ended June 30, 2023, covering segment results, non-GAAP measures, liquidity, capital resources, and debt, noting modest net sales increase and adequate liquidity Results of Operations For Q2 2023, consolidated net sales increased 2.6% YoY to $105.6 million, driven by 7.3% growth in Stoker's Products, with net income rising 83.0% to $9.9 million; H1 2023 net sales increased 1.3% to $206.6 million, with net income up 6.7% to $17.5 million Q2 2023 vs Q2 2022 Segment Performance (in thousands) | Segment | Net Sales Q2 2023 | Net Sales Q2 2022 | % Change | Gross Profit Q2 2023 | Gross Profit Q2 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Zig-Zag products | $46,722 | $46,226 | 1.1% | $26,422 | $26,430 | 0.0% | | Stoker's products | $36,056 | $33,588 | 7.3% | $19,968 | $18,079 | 10.4% | | Creative Distribution Solutions | $22,817 | $23,111 | -1.3% | $6,088 | $6,960 | -12.5% | H1 2023 vs H1 2022 Segment Performance (in thousands) | Segment | Net Sales H1 2023 | Net Sales H1 2022 | % Change | Gross Profit H1 2023 | Gross Profit H1 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Zig-Zag products | $88,609 | $91,898 | -3.6% | $48,812 | $52,773 | -7.5% | | Stoker's products | $69,718 | $65,291 | 6.8% | $39,433 | $35,765 | 10.3% | | Creative Distribution Solutions | $48,224 | $46,630 | 3.4% | $12,850 | $14,725 | -12.7% | - Selling, general, and administrative (SG&A) expenses decreased 4.8% to $62.7 million in H1 2023, primarily due to lower expenses related to PMTA applications, corporate restructuring, and ERP/CRM system scoping compared to the prior year[179] - Investment loss for H1 2023 was $8.9 million, an increase from $6.1 million in H1 2022. The 2023 loss was driven by a $6.5 million impairment charge on the company's investment in Docklight[181] EBITDA and Adjusted EBITDA The company uses non-GAAP measures EBITDA and Adjusted EBITDA to evaluate operating performance, with Q2 2023 Adjusted EBITDA at $25.3 million and H1 2023 at $46.1 million, adjusted for items like stock-based compensation ($2.8M in H1), FDA PMTA costs ($0.8M in H1), and non-cash asset impairments ($9.0M in H1) Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net income attributable to TPB, Inc. | $9,925 | $17,522 | | EBITDA | $18,212 | $33,057 | | Adjusted EBITDA | $25,279 | $46,064 | Liquidity and Capital Resources As of June 30, 2023, the company had $100.5 million in cash and $23.6 million available under its revolving credit facility, with net cash from operations significantly increasing to $27.5 million for H1 2023, indicating adequate liquidity for upcoming obligations - As of June 30, 2023, the company had $100.5 million of cash on hand and $23.6 million of availability under its 2021 Revolving Credit Facility[194] - Net cash provided by operating activities increased by $20.4 million to $27.5 million for the six months ended June 30, 2023, compared to the same period in 2022, primarily due to timing of changes in inventory and other working capital[197] - Net cash used in financing activities was $30.4 million for H1 2023, mainly due to $27.4 million in repurchases of Convertible Senior Notes. This compares to $22.5 million used in H1 2022, which included $19.4 million in common stock repurchases[199] - A dividend of $0.065 per common share was paid on July 7, 2023. The company has $27.2 million remaining available under its share repurchase program as of June 30, 2023[200][201] Quantitative and Qualitative Disclosures about Market Risk This section states there have been no material changes in the company's exposure to market risks, including foreign currency, credit, and interest rate risks, since the 2022 Annual Report, with fixed-rate debt mitigating interest rate changes - There have been no material changes in exposure to foreign currency fluctuation risk or credit risk during the first six months of 2023[225][226] - The company's Senior Secured Notes and Convertible Senior Notes bear interest at fixed rates, minimizing financial statement risk associated with changes in interest rates[227] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of June 30, 2023, due to previously disclosed material weaknesses in IT general controls and risk assessment processes, with ongoing remediation efforts including new hires and ERP system implementation - Management concluded that disclosure controls and procedures are not effective as of June 30, 2023, due to material weaknesses in internal controls over financial reporting disclosed in the 2022 Form 10-K[228] - The material weaknesses relate to IT general controls (user access, program change-management) and the risk assessment component of the internal control framework (segregation of duties)[229] - Remediation efforts are in progress, including hiring experienced accounting and internal control specialists, redesigning key controls, and implementing a new enterprise resource planning (ERP) system[231] PART II—OTHER INFORMATION Legal Proceedings This section details a proposed settlement for a stockholder lawsuit filed in 2020 concerning the merger with Standard Diversified, Inc. (SDI), involving a $5.0 million payment from defendants' insurers, with the remainder paid to the company after legal fees, pending court approval on November 9, 2023 - The company has reached a proposed settlement in the Paul-Emile Berteau stockholder lawsuit related to the 2020 merger with SDI[234] - The settlement terms include a $5.0 million payment by the defendants' insurers. Plaintiff's counsel will seek up to $1.5 million in fees and expenses from this amount, with the remainder paid to the company[235] - The proposed settlement is subject to court approval, with a hearing scheduled for November 9, 2023. The financial impact to the company is not expected to be material[235] Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its 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[238] Unregistered Sales of Equity Securities and Use of Proceeds The company discusses its share repurchase program, with $27.2 million remaining available as of June 30, 2023, noting no shares were repurchased under the public program during Q2 2023, but 4,431 shares were acquired for tax withholding obligations - As of June 30, 2023, approximately $27.2 million remains available for share repurchases under the company's authorized program[141] Share Repurchase Activity for Quarter Ended June 30, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | April 1 to April 30 | 4,431 | $23.65 | - | | May 1 to May 31 | - | - | - | | June 1 to June 30 | - | - | - | | Total | 4,431 | | - | - The 4,431 shares purchased were withheld by the company to cover statutory withholding taxes for holders of vested stock-based awards and were not part of the publicly announced repurchase program[242]