10-Q 1 brhc20056799_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, 2023

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, 2023, there were 17,595,579 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)
  
       
   
6
       
   
7
       
    Consolidated Statements of Income for the six months ended June 30, 2023 and 2022 8
       
   
9
       
    Consolidated Statements of Comprehensive Income for the six months ended June 30, 2023 and 2022
9
       
   
10
       
   
11
       
    11
       
   
12
       
 
ITEM 2
35
       
 
ITEM 3
 46
       
 
ITEM 4
 46
       
PART II—OTHER INFORMATION
  
   
 
ITEM 1
 47
       
 
ITEM 1A
 47
       
 
ITEM 2
 48
       
 
ITEM 3
 48
       
 
ITEM 4
 48
       
 
ITEM 5
 48
       
 
ITEM 6
 49
       
  50
 
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;

●
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 brand equity;

●
contamination of our tobacco supply or products;

●
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;

●
regulation or marketing denials of our products by the U.S. Food and Drug Administration, 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 vapor-related taxes;

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

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

●
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;

●
uncertainty surrounding FDA compliance policy;

●
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 comply with required disclosure requirements;

●
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;

4

 		●
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;

●
adverse impact of climate change;

●
our reliance on information technology;

●
cybersecurity and privacy breaches;

●
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.

5
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
  
2023
    
2022
  
Current assets:
            
Cash
  
$
100,507
    
$
106,403
  
Accounts receivable, net of allowances of $103 in 2023 and $114 in 2022
    
7,920
      
8,377
  
Inventories
    
125,056
      
119,915
  
Other current assets
    
18,216
      
22,959
  
Total current assets
    
251,699
      
257,654
  
Property, plant, and equipment, net
    
24,128
      
22,788
  
Deferred income taxes
    
7,966
      
8,443
  
Right of use assets
    
10,923
      
12,465
  
Deferred financing costs, net
    
229
      
282
  
Goodwill
    
136,244
      
136,253
  
Other intangible assets, net
    
82,048
      
83,592
  
Master Settlement Agreement (MSA) escrow deposits
    
28,229
      
27,980
  
Other assets
    
18,208
      
22,649
  
Total assets
  
$
559,674
    
$
572,106
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable
  
$
10,802
    
$
8,355
  
Accrued liabilities
    
30,898
      
33,001
  
Other current liabilities
    
5
      
20
  
Total current liabilities
    
41,705
      
41,376
  
Notes payable and long-term debt
    
379,195
      
406,757
  
Lease liabilities
    
9,528
      
10,593
  
Total liabilities
    
430,428
      
458,726
  
                 
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; 19,912,039 issued shares and 17,595,579 outstanding shares at June 30, 2023, and 19,801,623 issued shares and 17,485,163 outstanding shares at December 31, 2022
    
199
      
198
  
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
    
-
      
-
  
Additional paid-in capital
    
115,272
      
113,242
  
Cost of repurchased common stock (2,316,460 shares at June 30, 2023 and December 31, 2022)
    
(78,093
)
    
(78,093
)
Accumulated other comprehensive loss
    
(3,181
)
    
(2,393
)
Accumulated earnings
    
93,873
      
78,691
  
Non-controlling interest
    
1,176
      
1,735
  
Total stockholders’ equity
    
129,246
      
113,380
  
Total liabilities and stockholders’ equity
  
$
559,674
    
$
572,106
  

The accompanying notes are an integral part of the consolidated financial statements.
6
Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)

 
Three Months Ended
June 30,
  
   
2023
    
2022
  
             
Net sales
  
$
105,595
    
$
102,925
  
Cost of sales
    
53,117
      
51,456
  
Gross profit
    
52,478
      
51,469
  
Selling, general, and administrative expenses
    
31,933
      
33,323
  
Operating income
    
20,545
      
18,146
  
Interest expense, net
    
4,019
      
5,144
  
Investment loss
    
4,080
      
6,227
  
Gain on extinguishment of debt
     (600 )     -  
Income before income taxes
    
13,046
      
6,775
  
Income tax expense
    
3,338
      
1,569
  
Consolidated net income
    
9,708
      
5,206
  
Net loss attributable to non-controlling interest
    
(217
)
    
(218
)
Net income attributable to Turning Point Brands, Inc.
  
$
9,925
    
$
5,424
  
                 
Basic income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
0.56
    
$
0.30
  
Diluted income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
0.53
    
$
0.30
  
Weighted average common shares outstanding:
                
Basic
    
17,584,241
      
18,063,259
  
Diluted
    
20,409,943
      
21,443,279
  

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

 
Six Months Ended
June 30,
  
   
2023
    
2022
  
             
Net sales
  
$
206,551
    
$
203,819
  
Cost of sales
    
105,456
      
100,556
  
Gross profit
    
101,095
      
103,263
  
Selling, general, and administrative expenses
    
62,708
      
65,888
  
Operating income
    
38,387
      
37,375
  
Interest expense, net
    
8,029
      
10,340
  
Investment loss
    
8,879
      
6,149
  
Gain on extinguishment of debt
    
(1,377
)
    
-
  
Income before income taxes
    
22,856
      
20,886
  
Income tax expense
    
5,806
      
4,909
  
Consolidated net income
    
17,050
      
15,977
  
Net loss attributable to non-controlling interest
    
(472
)
    
(445
)
Net income attributable to Turning Point Brands, Inc.
  
$
17,522
    
$
16,422
  
                 
Basic income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
1.00
    
$
0.90
  
Diluted income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
0.94
    
$
0.86
  
Weighted average common shares outstanding:
                
Basic
    
17,556,030
      
18,159,940
  
Diluted
    
20,538,947
      
21,603,113
  

The accompanying notes are an integral part of the consolidated financial statements.
8
Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)

 
Three Months Ended
June 30,
  
   
2023
    
2022
  
Consolidated net income
  
$
9,708
    
$
5,206
  
                 
Other comprehensive income (loss), net of tax
                
Unrealized loss on MSA investments, net of tax of $116 in 2023 and $244 in 2022
    
(365
)
    
(768
)
Foreign currency translation, net of tax of $0 in 2023 and 2022
    
(169
)
    
45
  
Unrealized loss on derivative instruments, net of tax of $150 in 2023 and $0 in 2022
    
(472
)
    
-
  
     
(1,006
)
    
(723
)
Consolidated comprehensive income
    
8,702
      
4,483
  
Comprehensive loss attributable to non-controlling interest
    
(217
)
    
(203
)
Comprehensive income attributable to Turning Point Brands, Inc.
  
$
8,919
    
$
4,686
  


 
Six Months Ended
June 30,
  
   
2023
    
2022
  
Consolidated net income
  
$
17,050
    
$
15,977
  
                 
Other comprehensive income (loss), net of tax
                
Unrealized gain (loss) on MSA investments, net of tax of $60 in 2023 and $602 in 2022
    
188
      
(1,894
)
Foreign currency translation, net of tax of $0 in 2023 and 2022
    
(248
)
    
38
  
Unrealized loss on derivative instruments, net of tax of $259 in 2023 and $0 in 2022
    
(815
)
    
-
  
     
(875
)
    
(1,856
)
Consolidated comprehensive income
    
16,175
      
14,121
  
Comprehensive loss attributable to non-controlling interest
    
(472
)
    
(432
)
Comprehensive income attributable to Turning Point Brands, Inc.
  
$
16,647
    
$
14,553
  

The accompanying notes are an integral part of the consolidated financial statements.
9
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)

 
Six Months Ended
June 30,
  
   
2023
    
2022
  
Cash flows from operating activities:
            
Consolidated net income
  
$
17,050
    
$
15,977
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Gain on extinguishment of debt
    
(1,377
)
    
-
  
Loss (gain) on sale of property, plant, and equipment
    
44
      
(8
)
Depreciation expense
    
1,535
      
1,750
  
Amortization of other intangible assets
    
1,542
      
919
  
Amortization of deferred financing costs
    
1,225
      
1,291
  
Deferred income tax expense (benefit)
    
659
      
(146
)
Stock compensation expense
    
2,836
      
2,661
  
Noncash lease income
    
(29
)
    
(6
)
Loss on investments
    
8,989
      
6,258
  
Changes in operating assets and liabilities:
                
Accounts receivable
    
456
      
(2,673
)
Inventories
    
(5,146
)
    
(27,499
)
Other current assets
    
3,769
      
(598
)
Other assets
    
(4,548
)
    
624
  
Accounts payable
    
2,500
      
7,240
  
Accrued liabilities and other
    
(1,972
)
    
1,359
  
Net cash provided by operating activities
  
$
27,533
    
$
7,149
  
                 
Cash flows from investing activities:
                
Capital expenditures
  
$
(2,993
)
  
$
(5,694
)
Restricted cash, MSA escrow deposits
  
$
-
    
$
(10,078
)
Proceeds on the sale of property, plant and equipment
    
3
      
63
  
Net cash used in investing activities
  
$
(2,990
)
  
$
(15,709
)
                 
Cash flows from financing activities:
                
 Convertible Senior Notes repurchased
   $ (27,357 )   $ -  
 Proceeds from call options
     70       -  
Payment of dividends
    
(2,209
)
    
(2,181
)
Exercise of options
    
406
      
475
  
Redemption of options
     (346 )     (155 )
Redemption of performance restricted stock units
     (995 )     (1,228 )
Common stock repurchased
    
-
      
(19,418
)
Net cash used in financing activities
  
$
(30,431
)
  
$
(22,507
)
                 
Net decrease in cash
  
$
(5,888
)
  
$
(31,067
)
Effect of foreign currency translation on cash
  
$
(8
)
  
$
56
  
                 
Cash, beginning of period:
                
Unrestricted
    
106,403
      
128,320
  
Restricted
    
4,929
      
15,155
  
Total cash at beginning of period
    
111,332
      
143,475
  
                 
Cash, end of period:
                
Unrestricted
    
100,507
      
107,429
  
Restricted
    
4,929
      
5,035
  
Total cash at end of period
  
$
105,436
    
$
112,464
  
                 
Supplemental schedule of noncash investing activities:
                
Accrued capital expenditures
  
$
42
    
$
19
  
                 
Supplemental schedule of noncash financing activities:
                
Dividends declared not paid
  
$
1,188
    
$
1,110
  

The accompanying notes are an integral part of the consolidated financial statements.
10
Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Six Months Ended June 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 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 )
Performance restricted stock units issuance
    26,050       -       78       -       -       -       -       78  
Performance restricted stock units redeemed
    (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
  
                                                                 
                                                                 
Beginning balance April 1, 2022
    
18,180,174
    
$
198
    
$
109,073
    
$
(59,491
)
  
$
(1,326
)
  
$
81,327
    
$
2,083
    
$
131,864
  
                                                                 
Unrealized loss on MSA investments, net of tax of $244
     -       -       -       -       (768 )     -       -       (768 )
Foreign currency translation, net of tax of $0
     -       -       -       -       30       -       15       45  
Stock compensation expense
    
-
      
-
      
1,502
      
-
      
-
      
-
      
-
      
1,502
  
Exercise of options
    
7,175
      
-
      
230
      
-
      
-
      
-
      
-
      
230
  
Redemption of options
    -       -       (155 )     -       -       -       -       (155 )
Performance restricted stock units issuance
    4,754       -       -       -       -       -       -       -  
Performance restricted stock units redeemed
     -       -       (87 )     -       -       -       -       (87 )
Cost of repurchased common stock
    
(301,662
)
    
-
      
-
      
(8,796
)
    
-
      
-
      
-
      
(8,796
)
Dividends
    
-
      
-
      
-
      
-
      
-
      
(1,110
)
    
-
      
(1,110
)
Net income
    
-
      
-
      
-
      
-
      
-
      
5,424
      
(218
)
    
5,206
  
Ending balance June 30, 2022
    
17,890,441
    
$
198
    
$
110,563
    
$
(68,287
)
  
$
(2,064
)
  
$
85,641
    
$
1,880
    
$
127,931
  

                            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
    
17,485,163
    
$
198
    
$
113,242
    
$
(78,093
)
  
$
(2,393
)
  
$
78,691
    
$
1,735
    
$
113,380
  
                                                                 
Unrealized gain on MSA investments, net of tax of $60
    
-
       -       -       -      
188
      
-
      
-
      
188
  
Unrealized loss on derivative instruments, net of tax of $259     -       -       -       -       (815 )     -       -       (815 )
Foreign currency translation, net of tax of $0
    
-
      
-
      
-
      
-
      
(161
)
    
-
      
(87
)
    
(248
)
Stock compensation expense
    
-
      
-
      
2,836
      
-
      
-
      
-
      
-
      
2,836
  
Exercise of options
    
29,371
      
-
      
406
      
-
      
-
      
-
      
-
      
406
  
Redemption of options
     (15,985 )     -       (346 )     -       -       -       -       (346 )
Performance restricted stock units issuance
   
140,324
       1       77       -       -       -       -       78  
Performance restricted stock units redeemed
    (43,294 )     -       (995 )     -       -       -