10-Q 1 ef20030087_10q.htm 10-Q
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
For the quarterly period ended June 30, 2024

or

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission file number: 001-37763

TURNING POINT BRANDS, INC.
(Exact name of registrant as specified in its charter)

Delaware
  
20-0709285
(State or other jurisdiction of Incorporation or organization)
  
(I.R.S. Employer Identification No.)

5201 Interchange Way, Louisville, KY
  
40229
(Address of principal executive offices)
  
(Zip Code)

(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:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
TPB
New York Stock Exchange

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.

Large accelerated filer
☐
  
Accelerated filer
☑
Non-accelerated filer
☐
  
Smaller reporting company
☐
Emerging growth company
☐
      

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 July 26, 2024, there were 17,714,070 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.

TURNING POINT BRANDS, INC.
TABLE OF CONTENTS

   
Page No.
PART I—FINANCIAL INFORMATION
  
   
 
ITEM 1
Financial Statements (Unaudited)
  
       
   
5
       
   
6
       
   
7
       
   
8
 

 
   
9
       
    Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2024 and 2023 10
 
      
   
11
       
 
ITEM 2
33
       
 
ITEM 3
 45
       
 
ITEM 4
 46
       
PART II—OTHER INFORMATION
  
   
 
ITEM 1
 47
       
 
ITEM 1A
 47
       
 
ITEM 2
 47
   
 
 
ITEM 3
 47
       
 
ITEM 4
 47
       
 
ITEM 5
 47
       
 
ITEM 6
 48
       
  49

2
Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (this “Quarterly Report”), 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;

●
our dependence on a small number of third-party suppliers and producers;

●
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;

●
the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;

●
failure to maintain consumer brand recognition and loyalty of our customers;

●
our reliance on relationships with several large retailers and national chains for distribution of our products;

●
intense competition and our ability to compete effectively;

●
competition from illicit sources and the damage caused by illicit products to our brand equity;
 
●
contamination of our tobacco supply or products;

●
uncertainty and continued evolution of the markets for our products;

●
complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;

●
substantial and increasing regulation and changes in U.S. Food and Drug Administration (“FDA”) enforcement priorities;

●
regulation or marketing denials of our products by the FDA, which has broad regulatory powers;

●
many of our products contain nicotine, which is considered to be a highly addictive substance;

●
requirement to maintain compliance with master settlement agreement escrow account;

●
possible significant increases in federal, state and local municipal tobacco- and nicotine-related taxes;

●
our products are marketed pursuant to a policy of FDA enforcement priorities which could change, and our products could become subject to increased regulatory burdens by the FDA;

●
uncertainty related to the PMTA application process;

●
our products are subject to developing and unpredictable regulation, such as court actions that impact obligations;

●
increase in state and local regulation of our products has been proposed or enacted;

●
increase in tax of our products could adversely affect our business;

●
sensitivity of end-customers to increased sales taxes and economic conditions, including as a result of inflation and other declines in purchasing power;

●
possible increasing international control and regulation;

●
failure to comply with environmental, health and safety regulations;

●
imposition of significant tariffs on imports into the U.S.;

●
the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;

●
significant product liability litigation;

●
our amount of indebtedness;

●
the terms of our indebtedness, which may restrict our current and future operations;
 
●
our ability to establish and maintain effective internal controls over financial reporting;

●
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;

3

 ●
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;

●
adverse impact of climate change;

●
our reliance on information technology;

●
cybersecurity and privacy breaches, which have increased in part due to artificial intelligence;

●
failure to manage our growth;

●
failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;

●
fluctuations in our results;

●
exchange rate fluctuations;

●
adverse U.S. and global economic conditions;

●
departure of key management personnel or our inability to attract and retain talent;

●
infringement on or misappropriation of our intellectual property;

●
third-party claims that we infringe on their intellectual property; and

●
failure to meet expectations relating to environmental, social and governance factors.

4
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)
   
(unaudited)
        
    June 30,     December 31,  
ASSETS
  
2024
    
2023
  
Current assets:
            
Cash
  
$
142,159
    
$
117,886
  
Accounts receivable, net of allowances of $54 in 2024 and $78 in 2023
    
12,557
      
9,989
  
Inventories, net
    
102,333
      
98,960
  
Other current assets
    
32,688
      
40,781
  
Total current assets
    
289,737
      
267,616
  
Property, plant, and equipment, net
    
26,441
      
25,300
  
Deferred income taxes
    
1,177
      
1,468
  
Right of use assets
    
10,305
      
11,480
  
Deferred financing costs, net
    
2,145
      
2,450
  
Goodwill
    
136,307
      
136,250
  
Other intangible assets, net
    
79,393
      
80,942
  
Master Settlement Agreement (MSA) escrow deposits
    
28,407
      
28,684
  
Other assets
    
17,644
      
15,166
  
Total assets
  
$
591,556
    
$
569,356
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable
  
$
11,919
    
$
8,407
  
Accrued liabilities
    
30,428
      
33,635
  
Current portion of long-term debt
     118,470       58,294  
Total current liabilities
    
160,817
      
100,336
  
Notes payable and long-term debt
    
247,960
      
307,064
  
Lease liabilities
    
8,834
      
9,950
  
Total liabilities
   $
417,611
     $
417,350
  
                 
Commitments and contingencies
            
                 
Stockholders’ equity:
                
Preferred stock, $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
    
–
      
–
  
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 20,126,521 issued shares and 17,703,166 outstanding shares at June 30, 2024, and 19,922,137 issued shares and 17,605,677 outstanding shares at December 31, 2023
    
201
      
199
  
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
    
–
      
–
  
Additional paid-in capital
    
121,948
      
119,075
  
Cost of repurchased common stock (2,423,355 shares at June 30, 2024 and 2,316,460 shares December 31, 2023)
    
(81,144
)
    
(78,093
)
Accumulated other comprehensive loss
    
(3,072
)
    
(2,648
)
Accumulated earnings
    
134,917
      
112,443
  
Non-controlling interest
    
1,095
      
1,030
  
Total stockholders’ equity
    
173,945
      
152,006
  
Total liabilities and stockholders’ equity
  
$
591,556
    
$
569,356
  

The accompanying notes are an integral part of the consolidated financial statements.
5
Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share and per share data)
(unaudited)

 
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2024
    
2023
    
2024
    
2023
  
Net sales (1)
  
$
108,512
    
$
105,595
     $ 205,570     $ 206,551  
Cost of sales
    
54,671
      
53,117
       99,817       105,456  
Gross profit
    
53,841
      
52,478
       105,753       101,095  
Selling, general, and administrative expenses
    
32,753
      
31,933
       65,399       62,708  
Other operating income
     (1,674 )     –       (1,674 )     –  
Operating income
    
22,762
      
20,545
       42,028       38,387  
Interest expense, net
    
2,991
      
4,019
       6,470       8,029  
Investment loss
    
2,439
      
4,080
       2,320       8,879  
Gain on extinguishment of debt
     –       (600 )     –       (1,377 )
Income before income taxes
    
17,332
      
13,046
       33,238       22,856  
Income tax expense
    
4,415
      
3,338
       8,142       5,806  
Consolidated net income
    
12,917
      
9,708
       25,096       17,050  
Net (loss) income attributable to non-controlling interest
    
(87
)
    
(217
)
     82       (472 )
Net income attributable to Turning Point Brands, Inc.
  
$
13,004
    
$
9,925
     $
25,014     $
 17,522  
                                 
Basic income per common share:
                                
Net income attributable to Turning Point Brands, Inc.
  
$
0.74
    
$
0.56
     $
 1.42     $
 1.00  
Diluted income per common share:
                                
Net income attributable to Turning Point Brands, Inc.
  
$
0.68
    
$
0.53
     $
 1.31     $
 0.94  
Weighted average common shares outstanding:
                                
Basic
    
17,656,732
      
17,584,241
       17,655,713       17,556,030  
Diluted
    
20,156,854
      
20,409,943
       20,160,139       20,538,947  

(1) Net sales include excise taxes billed to customers of $0.8 million and $1.2 million for the three months ended June 30, 2024 and 2023, respectively.  Net sales include excise taxes billed to customer of $1.5 million and $2.4 million for the six months ended June 30, 2024 and 2023, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

6
Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)


  
Three Months Ended
June 30
  
   
2024
    
2023
  
Consolidated net income
  
$
12,917
    
$
9,708
  
                 
Other comprehensive income (loss), net of tax
                
Unrealized loss on MSA investments, net of tax of $4 in 2024 and $116 in 2023
    
(15
)
    
(365
)
Foreign currency translation, net of tax of $0 in 2024 and 2023
    
(26
)
    
(169
)
Unrealized gain (loss) on derivative instruments, net of tax of $4 in 2024 and $150 in 2023
    
15
      
(472
)
Unrealized loss on captive investments, net of tax of $0 in 2024
     (7 )     –  
     
(33
)
    
(1,006
)
Consolidated comprehensive income
    
12,884
      
8,702
  
Comprehensive loss attributable to non-controlling interest
    
(87
)
    
(217
)
Comprehensive income attributable to Turning Point Brands, Inc.
  
$
12,971
    
$
8,919
  


 
Six Months Ended
June 30,
  
   
2024
    
2023
  
Consolidated net income
  
$
25,096
    
$
17,050
  
                 
Other comprehensive income (loss), net of tax
                
Unrealized (loss) gain on MSA investments, net of tax of $19 in 2024 and $60 in 2023
    
(257
)
    
188
  
Foreign currency translation, net of tax of $0 in 2024 and 2023
    
(13
)
    
(248
)
Unrealized loss on derivative instruments, net of tax of $53 in 2024 and $259 in 2023
    
(171
)
    
(815
)
     
(441
)
    
(875
)
Consolidated comprehensive income
    
24,655
      
16,175
  
Comprehensive income (loss) attributable to non-controlling interest
    
82
      
(472
)
Comprehensive income attributable to Turning Point Brands, Inc.
  
$
24,573
    
$
16,647
  

The accompanying notes are an integral part of the consolidated financial statements.
7
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)

 
Six Months Ended
June 30,
  
   
2024
    
2023
  
Cash flows from operating activities:
            
Consolidated net income
  
$
25,096
    
$
17,050
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Gain on extinguishment of debt
    
–
      
(1,377
)
Loss on sale of property, plant, and equipment
    
7
      
44
  
Loss on MSA investments
     6       –  
Depreciation and other amortization expense
    
1,916
      
1,535
  
Amortization of other intangible assets
    
1,559
      
1,542
  
Amortization of deferred financing costs
    
1,393
      
1,225
  
Deferred income tax expense
    
363
      
659
  
Stock compensation expense
    
3,951
      
2,836
  
Noncash lease income
    
(85
)
    
(29
)
Loss on investments
    
2,722
      
8,989
  
Changes in operating assets and liabilities:
                
Accounts receivable
    
(2,489
)
    
456
  
Inventories
    
(3,218
)
    
(5,146
)
Other current assets
    
4,863
      
3,769
  
Other assets
    
(279
)
    
(4,548
)
Accounts payable
    
3,565
      
2,500
  
Accrued liabilities and other
    
(3,293
)
    
(1,972
)
Net cash provided by operating activities
  
$
36,077
    
$
27,533
  
                 
Cash flows from investing activities:
                
Capital expenditures
  
$
(2,858
)
  
$
(2,993
)
Purchases of investments
     (7,934 )     –
  
Proceeds from sale of investments
     3,314       –  
Purchases of non-marketable equity investments
     (500 )     –  
Proceeds on the sale of property, plant and equipment
    
2
      
3
  
Restricted cash, MSA escrow deposits
     4       –  
Net cash used in investing activities
  
$
(7,972
)
  
$
(2,990
)
                 
Cash flows from financing activities:
                
Convertible Senior Notes repurchased
   $ –     $ (27,357 )
Proceeds from call options
     –       70  
Payment of financing costs
     (133 )     –  
Payment of dividends
    
(2,407
)
    
(2,209
)
Exercise of options
    
900
      
406
  
Redemption of options
     (4 )     (346 )
Redemption of restricted stock units
    (840 )     –  
Redemption of performance based restricted stock units
     (1,212 )     (995 )
Common stock repurchased
    
(3,051
)
    
–
  
Net cash used in financing activities
  
$
(6,747
)
  
$
(30,431
)
                 
Net increase (decrease) in cash
  
$
21,358
    
$
(5,888
)
Effect of foreign currency translation on cash
  
$
(76
)
  
$
(8
)
                 
Cash, beginning of period:
                
Unrestricted
  
$
117,886
    
$
106,403
  
Restricted
    
4,929
      
4,929
  
Total cash at beginning of period
  
$
122,815
    
$
111,332
  
                 
Cash, end of period:
                
Unrestricted
  
$
142,159
    
$
100,507
  
Restricted
    
1,938
      
4,929
  
Total cash at end of period
  
$
144,097
    
$
105,436
  
                 
Supplemental schedule of noncash investing activities:
                
Accrued capital expenditures
  
$
–
    
$
42
  
                 
Supplemental schedule of noncash financing activities:
                
Dividends declared not paid
  
$
1,279
    
$
1,188
  

The accompanying notes are an integral part of the consolidated financial statements.
8
Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended June 30, 2024 and 2023
(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 April 1, 2024
    
17,627,817
    
$
200
    
$
119,792
    
$
(80,172
)
  
$
(3,048
)
  
$
123,192
    
$
1,191
    
$
161,155
  
                                                                 
Unrealized loss on MSA investments, net of tax of $4
    
–
      
–
      
–
      
–
      
(15
)
    
–
      
–
      
(15
)
Unrealized gain on derivative instruments, net of tax of $4
     –       –       –       –       15       –       –       15  
Foreign currency translation, net of tax of $0
    
–
      
–
      
–
      
–
      
(17
)
    
–
      
(9
)
    
(26
)
Unrealized loss on investments, net of tax of $0
     –       –       –       –       (7 )     –       –       (7 )
Stock compensation expense
    
–
      
–
      
1,889
      
–
      
–
      
–
      
–
      
1,889
  
Exercise of options
    
61,249
      
–
      
897
      
–
      
–
      
–
      
–
      
897
  
Redemption of options
     (168 )     –       (4 )     –       –       –               (4 )
Cost of repurchased common stock
     (34,350 )     –       –       (972 )     –       –       –       (972 )
Issuance of performance based restricted stock units
     3,214       –       –       –       –       –       –       –  
Issuance of restricted stock units
     68,343       1       78       –       –       –       –       79  
Redemption of restricted stock units
     (22,939 )     –       (704 )     –       –       –       –       (704 )
Dividends
    
–
      
–
      
–
      
–
      
–
      
(1,279
)
    
–
      
(1,279
)
Net income
    
–
      
–
      
–
      
–
      
–
      
13,004
      
(87
)
    
12,917
  
Ending balance June 30, 2024
    
17,703,166
    
$
201
    
$
121,948
    
$
(81,144
)
  
$
(3,072
)
  
$
134,917
    
$
1,095
    
$
173,945
  
                                                                 
                                                                 
Beginning balance April 1, 2023
    
17,585,529
    
$
199
    
$
113,477
    
$
(78,093
)
  
$
(2,234
)
  
$
85,133
    
$
1,452
    
$
119,934
  
                                                                 
Unrealized loss on MSA investments, net of tax of $116
    
–
      
–
      
–
      
–
      
(365
)
    
–
       –      
(365
)
Unrealized loss on derivative instruments, net of tax of $150
     –
       –       –       –       (472 )     –       –       (472 )
Foreign currency translation, net of tax of $0
     –       –       –       –       (110 )     –       (59 )     (169 )
Stock compensation expense
    
–
      
–
      
2,093
      
–
      
–
      
–
       –      
2,093
  
Exercise of options
    
4,416
      
–
      
49
      
–
      
–
      
–
       –      
49
  
Redemption of options
     (15,985 )     –       (346 )     –       –       –       –       (346 )
Issuance of performance restricted stock units 
    26,050       –       78       –       –       –       –       78  
Redemption of performance restricted stock units
    (4,431 )     –       (105 )     –       –       –       –       (105 )
Settlement of call options, net of tax of $9
     –       –       26       –       –       -       -       26  
Dividends
    
–
      
–
      
–
      
–
      
–
      
(1,185
)
     –      
(1,185
)
Net income
    
–
      
–
      
–
      
–
      
–
      
9,925
       (217 )    
9,708
  
Ending balance June 30, 2023
    
17,595,579
    
$
199
    
$
115,272
    
$
(78,093
)
  
$
(3,181
)
  
$
93,873
    
$
1,176
    
$
129,246
  

The accompanying notes are an integral part of the consolidated financial statements.
9
Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended June 30, 2024 and 2023
(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, 2024
    
17,605,677
    
$
199
    
$
119,075
    
$
(78,093
)
  
$
(2,648
)
  
$
112,443
    
$
1,030
    
$
152,006
  
                                                                 
Unrealized loss on MSA investments, net of tax of $19
    
–
      
–
      
–
      
–
      
(257
)
    
–
      
–
      
(257
)
Unrealized loss on derivative instruments, net of tax of $53
     –       –       –       –       (171 )     –       –       (171 )
Foreign currency translation, net of tax of $0
    
–
      
–
      
–
      
–
      
4
      
–
      
(17
)
    
(13
)
Stock compensation expense
    
–
      
–
      
3,951
      
–
      
–
      
–
      
–
      
3,951
  
Exercise of options
    
61,447
      
–
      
900
      
–
      
–
      
–
      
–
      
900
  
Redemption of options
     (168 )     –       (4 )     –       –       –       –       (4 )
Cost of repurchased common stock
     (106,895 )     –       –       (3,051 )     –       –       –       (3,051 )
Issuance of performance based restricted stock units
     129,323       1       –       –       –       –       –       1  
Redemption of performance based restricted stock units
     (48,177 )     –       (1,212 )     –       –       –       –       (1,212 )
Issuance of restricted stock units
     90,040       1       78       –