You should read the following discussion of the historical financial condition and results of operations in conjunction with our historical condensed consolidated financial statements and accompanying notes, which are included elsewhere in this Annual Report on Form 10-K. In addition, this discussion includes forward-looking statements subject to risks and uncertainties that may result in actual results differing from statements we make. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that could cause actual results to differ include those risks and uncertainties discussed in “Risk Factors.”
The following discussion relates to the audited financial statements of Turning Point Brands, Inc., included elsewhere in this Annual Report on Form 10-K. In this discussion, unless the context requires otherwise, references to “our Company” “we,” “our,” or “us” refer to Turning Point Brands, Inc., and its consolidated subsidiaries. References to “TPB” refer to Turning Point Brands, Inc., without any of its subsidiaries. We were incorporated in 2004 under the name North Atlantic Holding Company, Inc. On November 4, 2015, we changed our name to Turning Point Brands, Inc. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.
Our portfolio of brands includes some of the most widely recognized names in the alternative smoking accessories and OTP industry,industries, such as Stoker’sZig-Zag®, Zig-ZagStoker’s®, Vapor Beast®and VaporBeastVaporFi®. The following table sets forth the market share and category rank of our core products and demonstrates their industry positions:
Stoker’s® | (1)Moist Snuff | | Stoker’s Products | | 5.2% | | #3 discount, #6 overall | Stoker’s® | | Chewing Tobacco | | Stoker’s Products | | 24.4% | | #1 discount, #2 overall |
(1) Market share and category rank data for all products are derived from MSAi data as of52 weeks endeding 12/31/17.26/20. |
Operations
As of December 31, 2017, our products are available in approximately 170,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 200,000 points of distribution. We subscribe to a sales tracking system from MSAi that records all OTP product shipments (ours as well as those of our competitors) from approximately 900 wholesalers to over 250,000 traditional retail stores in the U.S. This system enables us to understand individual product share and volume trends across multiple categories down to the individual retail store level, allowing us to allocate field salesforce coverage to the highest opportunity stores. Our sales and marketing group of approximately 145180 professionals utilizesutilize the MSAi system to efficiently target markets and sales channels with the highest sales potential.
Our core tobacco business (SmokelessZig-Zag Products and Smoking segments)Stoker’s Products segments primarily generatesgenerate revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations. Our acquisition of VaporBeast in November 2016 expanded our revenue streams as we began selling directly to non-traditional retail outlets and to ultimate consumers via non-traditional retail outlets as well.outlets. Our acquisition of Vapor Shark further expandedIVG in 2018 enhanced our selling network by allowingB2C revenue stream with the addition of the Vapor-Fi online platform. The acquisition of Solace provided us to directly reach ultimate consumers through Vapor Shark branded retail outlets.with a line of leading liquids and a powerful new product development platform. Our net sales, which include federal excise taxes, consist of gross sales net of cash discounts, returns, and selling and marketing allowances.
We rely on long-standing relationships with high-quality, established manufacturers to provide the majority of our produced products. Approximately 87%More than 80% of our production, as measured by grossnet sales, is outsourced to suppliers. The remaining 13% representsproduction consists primarily of our moist snuff tobacco operations located in Dresden, TN,Tennessee, and the packaging of our pipe tobacco in Louisville, KY.Kentucky. Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products which we produce in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of salaried personnel. Our other principal expenses include interest expense and other expenses.
Key Factors Affecting Our Results of Operations
We consider the following to be the key factors affecting our results of operations:
| · | Our ability to further penetrate markets with our existing products; |
| · | Our ability to introduce new products and product lines that complement our core business; |
| · | Decreasing interest in tobacco products among consumers; |
| · | Price sensitivity in our end-markets; |
| · | Marketing and promotional initiatives, which cause variability in our results; |
| · | General economic conditions, including consumer access to disposable income; |
| · | Cost and increasing regulation of promotional and advertising activities; |
| · | Cost of complying with regulation, including newly passed “deeming regulations”Cost of complying with regulation, including “deeming regulation”; |
| · | Counterfeit and other illegal products in our end-markets; |
| · | Our ability to identify attractive acquisition opportunities in OTP;Our ability to identify attractive acquisition opportunities; and |
| · | Our ability to integrate acquisitions. |
Recent Developments
Credit Facility Refinancing
On March 7, 2018 we entered into a $250 million credit facility consisting of $200 million in first and second lien term loans and $50 million in a revolving credit facility (collectively, the “2018 Credit Facility”). We used a portion of the proceeds from the 2018 Credit Facility to repay, in full, the 2017 Credit Facility. (For a more complete description of our 2018 Credit Facility, see”- Subsequent Events – Refinancing.”)
Other Developments
On November 9, 2017, our Board of Directors approved the initiation of a cash dividend to shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15, 2017, to shareholders of record at the close of business on November 27, 2017.
On July 28, 2017, the U.S. Food and Drug Administration (“FDA”) announced a new direction in regulating tobacco products, including the newly “deemed” markets such as cigars and vapor products. FDA stated it intends to begin several new rulemaking processes, some of which will outline foundational rules governing the premarket application process for the deemed products, including Substantial Equivalence Applications and Premarket Tobacco Applications. Compliance and related costs could be significant and could increase the costs of operating in our NewGen Segment. The original filing deadlines for the applications of these newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe) and August 8, 2022, for “non-combustible” products (e.g., vapor products). No other application filing deadlines were altered. FDA also acknowledged a “continuum of risk” among tobacco products (i.e., that certain tobacco products pose a greater risk to individual and public health than others), that it intends to seek public comment on the role that flavors play in attracting youth and the role that flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery, and that it will increase its focus on the regulation of cigarette products. This new FDA direction follows increased taxation efforts by state municipalities including the implementation of a $0.55 per ounce excise tax on smokeless products in Pennsylvania enacted on October 1, 2016, and an increase in tax on all OTP products sold in California to 65.1% effective July 1, 2017.Recent Developments
On June 30, 2017, we filed a Form S-3 Registration Statement with the Securities and Exchange Commission providing for the potential to offer up to $200 million in the aggregate of our common stock, preferred stock, depository shares, warrants, and units, as well as a secondary offering and sale of up to approximately 12.8 million shares of TPB common stock by selling shareholders. We currently have no plans to utilize the offering; however, we believe it provides future flexibility as we continue to drive our strategic organic growth and acquisition initiatives.COVID-19 Impact
In March 2017, we entered into a strategic partnership with The Hand Media, d/b/a Vapor Shark (“Vapor Shark”), a leading distributor and manufacturer of premium vaping e-liquids with nationwide distribution through independent retail vape shops as well as Vapor Shark branded retail locations. Through the strategic partnership, we were issued a warrant to purchase all outstanding stock of Vapor Shark in exchange for a commitment to deposit up to $2.5 million. In April 2017, we entered into a management agreement with Vapor Shark whereby we gained control of the Vapor Shark operations. On June 30, 2017, we exercised the warrant and obtained ownership of 100% of the outstanding shares of Vapor Shark. Our exercise of the warrant triggered an option giving Vapor Shark’s former sole shareholder the right to purchase Vapor Shark’s company-owned stores for $1. As part of the acquisition, we recorded a liability of $0.6 million related to the former shareholder’s option to purchase the company-owned stores. In December 2017, the Company offered to pay Vapor Shark’s former sole shareholder $1.5 million in exchange for his right to purchase the company-owned stores. The agreement was finalized in January 2018, and the Company paid $1.0 million in February 2018 with the remaining $0.5 million to be paid in 24 monthly installments.
IPO
In May 2016, we sold 6,210,000 shares of voting common stock in our IPO at a price of $10.00 per share. The gross proceeds of the IPO totaled $62.1 million. Refer to the 2016 Annual Report on Form 10-K for details regarding use of the IPO proceeds.
In April 2016, we increased the total authorized shares of preferred and voting and non-voting common stock and effected a 10.43174381 for 1 stock split of our voting and non-voting common stock. As a result of the stockextraordinary situation caused by the COVID-19 pandemic, our focus is on the safety and well-being of our colleagues and the communities and customers we serve. As an organization, we have implemented several changes to enhance safety and mitigate health risk in our work environment. For our warehouse and manufacturing operations, these include split shifts, temperature scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization. These changes resulted in higher operational costs related to maintaining a safer work environment and fulfilling orders.
We canceled all previously reported share amounts (including optionsunnecessary travel and warrants)facilitated telecommuting where possible. Like many companies, we have changed the way we communicate through increased use of videoconferencing and have implemented tele-selling initiatives through our sales force. Some of these changes that are proving to be efficient are likely to remain in-place even after the restrictions caused by the pandemic are lifted and will lead to on-going cost savings. We have also put a hold on new spending commitments as we cautiously manage through this environment.
We hired additional employees in our Louisville facility and implemented temporary wage increases for our hourly employees to meet increased demand. We shifted production capacity to manufacture hand sanitizers and have donated bottles to hospitals, nursing homes and first responders in our local communities.
COVID-19 may impact our results. Our third-party cigar wrap manufacturer in the accompanying financial statementsDominican Republic was temporarily shut down. Our supply chain has remained operational otherwise. Select budgeted annual price increases will be delayed. Our B2C platforms have seen elevated sales levels from consumer shifts to online purchasing, and related noteswe gained market share. We continue to monitor this challenging environment closely and will make necessary adjustments as needed to make sure we are serving our employees and customers, while also protecting the safety of employees and communities.
In June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for $47.7 million in total consideration, comprised of $37.7 million in cash, including $1.7 million of capitalized transaction costs, and a $10.0 million unsecured subordinated promissory note (“Promissory Note”). With this transaction, the Company acquired co-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones. The Company also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA effective October 9, 2020. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones.
Standard Diversified Inc. (“SDI”)
In July, 2020, we completed our merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of TPB in a tax-free downstream merger. Under the terms of the merger, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock. SDI divested its assets prior to close of the merger such that SDI’s net liabilities at closing were minimal and the only assets that it retained were its remaining TPB Common Stock holdings. In addition, 244,214 shares of TPB Common Stock were retired in the transaction. As a result of the transaction, we no longer have a controlling shareholder, our public float of shares outstanding was significantly improved and we eliminated the overhang of a controlling holding company structure.
Premarket Tobacco Applications
We submitted Premarket Tobacco Applications (“PMTAs”) covering 250 products to the FDA prior to the September 9, 2020 filing deadline. The PMTAs cover a broad assortment of products in the vapor category including multiple proprietary e-liquid offerings in varying nicotine strengths, technologies and sizes; proprietary replacement parts and components of open system tank devices through partnerships with two leading manufacturers for exclusive distribution of products in the United States; and a closed system e-cigarette.
Wild Hempettes LLC On October 1, 2020, we acquired a 20% stake in Wild Hempettes LLC (“Wild Hempettes”), a leading manufacturer of hemp cigarettes under the WildHemp™ and Hempettes™ brands, for $2.5 million. We have options to increase our stake to a 100% ownership position based on certain milestones. As part of the transaction, the Wild Hempettes joint venture was spun off from Crown Distributing LLC and formed as a vehicle for us to be the exclusive distributor of Hempettes™ to U.S. bricks and mortar retailers under a profit-sharing arrangement.
Sale of Vapor Shark Retail Assets
On October 1, 2020, we sold the assets of our remaining seven Vapor Shark retail stores in Oklahoma. We will receive monthly royalties over the next 4 years as consideration for the assets. Net sales and gross profit related to these stores were $2.9 million and $1.6 million, respectively, for the year ended December 31, 2020.
dosistTM
On October 26, 2020, we invested $15.0 million in dosistTM, a global cannabinoid company, with an option to invest an additional $15.0 million on pre-determined terms over the next 12 months. We received a warrant to receive preferred shares of dosistTMthat will automatically be exercised upon the changing of federal laws in the United States, rescheduling cannabis and/or permitting the general cultivation, distribution and possession of cannabis.
ReCreation Marketing Investment
In July 2019 we obtained a 30% stake in Canadian distribution entity, ReCreation Marketing (“ReCreation”) for $1.0 million paid at closing. In November 2020, we invested an additional $3.0 million increasing our ownership interest to 50%. We received board seats aligned with our ownership position. We also provided a $2.0 million unsecured loan to ReCreation bearing interest at 8% per annum and maturing November 19, 2022. The Company has determined that ReCreation is a VIE due its required subordinated financial support. The Company has determined it is the primary beneficiary due its 50% equity interest, additional subordinated financing and distribution agreement with ReCreation for the sale of the Company’s products. As a result, the Company began consolidating ReCreation effective November 2020.
ReCreation is a specialty marketing and distribution firm focused on building brands in the Canadian alternative smoking accessories, tobacco and other alternative products categories. ReCreation’s management has significant expertise in marketing and distributing alternative smoking accessories and tobacco products throughout Canada. ReCreation’s management and advisory team has over 50 years combined experience building and managing a portfolio of premium brands, all supported by an expert team of sales associates working across Canada to provide service to over 30,000 traditional retail outlets and newly constructed cannabis dispensaries.
Senior Secured Notes and New Revolving Credit Facility
On February 11, 2021, the Company closed a private offering (the “Offering”) of $250 million aggregate principal amount of its 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. The Company used the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 First Lien Term Loan and 2018 First Lien Revolver, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.
In connection with the Offering, the Company also entered into a new $25 million senior secured revolving credit facility (the “New Revolving Credit Facility”). The Company did not draw any borrowings under the New Revolving Credit Facility on the effective date of the facility but did have been retrospectively restatedletters of credit of approximately $3.6 million outstanding. The New Revolving Credit Facility will mature on August 11, 2025 if none of the Company’s Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to reflect the stock split.maturity date of July 15, 2024 for such Convertible Senior Notes.
See “—Liquidity and Capital Resources—Long-Term Debt” for additional information.
Critical Accounting Policies and Uses of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in the specific circumstances. Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties. Actual results could differ from these estimates. We evaluate our estimates, including those related to revenue recognition, collectability of accounts receivable, inventory valuation and obsolescence, goodwill, intangibles, pension and postretirement obligations, income taxes, litigation, and contingencies on an ongoing basis. We base these estimates on our historical experience and other assumptions we believe are appropriate under the circumstances. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements.
Revenue Recognition.
We recognize revenues, net of sales incentives and sales returns, including shipping and handling charges billed to customers, upon delivery to the customer at which time there is a transfer of title and risk of loss to the customer in accordance with ASC 605-10-S99. We classify customer rebates as sales deductions in accordance with the requirements of ASC 605-50-25.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time our performance obligation is satisfied—at an amount that we expect to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. We exclude from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars or vaping products billed to customers).
We record an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. We record sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.
A further requirement of ASU 2014-09 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Our management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary, and most useful, disaggregation of our contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 21 of our Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales channel can be found within Note 21 as well.
Derivative Instruments. – Currency Forward Contracts
We use foreign currency forward contracts to hedge a portion of our exposure to changes in foreign currency exchange rates from time to time. We account for our forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under our policy, as amended, we may hedge up to 100% of our anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. We may also, from time to time, hedge up to ninety percent of our non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these contracts are transferred from other comprehensive income into net incomeinventory as the related inventories are received.received and are transferred to net income as inventory is sold. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized in income currently.
Derivative Instruments - Interest Rate Swaps
We enter into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. We account for interest rate swap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensive income into net income upon settlement of the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.
Goodwill and Other Intangible Assets.
We follow the provisions of ASC 350, Intangibles – Goodwill and Other. In accordance with ASC 350-20-35,Other in accounting for our goodwill and other intangible assets. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually on December 31, or more frequently if certain indicators are present.present, in accordance with ASC 350-20-35 and ASC 350-30-35, respectively. If the carrying value of the goodwill or indefinite-life intangible asset exceeds its fair value, which is determined using the discounted cash flows method and the relief-from-royalty method, respectively, the goodwill or intangible asset is considered impaired. The carrying value of the goodwill or indefinite-life intangible asset would then be reduced to fair value. For goodwill, the determination of a reporting unit’s fair value involves, among other things, our market capitalization and application of the income approach, which includes developing forecasts of future cash flows and determining an appropriate discount rate.
Based on our annual goodwill impairment testing, the estimated fair values of each of our reporting units were substantially in excess of the respective carrying values.values at December 31, 2020. We had no such impairment of goodwill or other intangible assets during the year ended December 31, 2017.2020. However, there could be an impairment of the goodwill of the NewGen reporting unit if future revenues do not achieve our expected future cash flows or if macroeconomic conditions result in future increases in the weighted average cost of capital used to estimate fair value. Refer to Note 10 of Notes to Consolidated Financial Statements for further details regarding our goodwill and other intangible assets as of December 31, 2020.
Fair Value:Value
GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The three levels of the fair value hierarchy under GAAP are described below:
| · | Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date. |
| · | Level 2 – Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| · | Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issue’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, we separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. This evaluation can be complex and requires management to make assumptions to determine the fair value.
Retirement Plans.
We follow the provisions of ASC 715, Compensation – Retirement Benefits in accounting for our retirement plans, which requires an employer to (i) recognize in its statement of financial position the funded status of a benefit plan, measured as the difference between the fair value of plan assets and benefit obligations; (ii) recognize, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; and (iii) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position.
Income Taxes.
We account for income taxes under ASC 740. We record the effects of income taxes under the liability method in which deferred income tax assets and liabilities are recognized based on the difference between the financial and tax basis of assets and liabilities using the enacted tax rates in effect for the years in which the differences are expected to reverse. We assess our ability to realize future benefits of deferred tax assets by determining if they meet the “more likely than not” criteria in ASC 740, Income Taxes. If we determine that future benefits do not meet the “more likely than not” criteria, a valuation allowance is recorded.
Stock-Based Compensation.
We measure stock compensation costs related to our stock options on the fair value basedvalue-based method under the provisions of ASC 718, Compensation – Stock Compensation, which requires compensation cost for stock options to be recognized based on the fair value of stock options granted. We determined the fair value of these awards using the Black-Scholes option pricing model.
We grant performance-based restricted stock units (“PRSU”) subject to both performance-based and service-based vesting conditions. The fair value of each PRSU is our stock price on the date of grant. For purposes of recognizing compensation expense as services are rendered in accordance with ASC 718, we assume all employees involved in the PRSU grant will provide service through the end of the performance period. Stock compensation expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant.
Accounts Receivable.
Accounts receivable are recognized at their net realizable value. All accounts receivable are trade-related and are recorded at the invoiced amount and do not bear interest. We maintain allowances for doubtful accounts receivable for estimated uncollectible invoices resulting from the customer’s inability to pay, which may result in write-offs. We recorded an allowance for doubtful accounts of $0.2 million and less than $0.1$0.3 million at December 31, 20172020 and 2016,2019, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost was determined using the LIFO method for approximately 51%45.1% of the inventories.inventories as of December 31, 2020. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing. We recorded an inventory valuation allowance of $0.5$9.9 million and $0.6$21.5 million at December 31, 20172020 and 2016,2019, respectively.
Jumpstart Our Business Startups Act of 2012
We chose to “opt out” of the provision of the JOBS Act that permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, we will comply with new or revised accounting standards as required for public companies. Our decision to opt out of the extended transition period provided in the JOBS Act is irrevocable.
Results of Operations
Summary
The table and discussion set forth below relates to our consolidated results of operations for the years ended December 31 (in thousands):
| | Year Ended December 31, | | | For the year ended December 31, | | | | 2017 | | | 2016 | | | % Change | | | 2015 | | | % Change | | | 2020 | | | 2019 | | | % Change | | | 2018 | | | % Change | | Consolidated Results of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Smokeless products | | $ | 84,560 | | | $ | 77,913 | | | | 8.5 | % | | $ | 74,293 | | | | 4.9 | % | | Smoking products | | | 109,956 | | | | 111,005 | | | | -0.9 | % | | | 105,898 | | | | 4.8 | % | | Zig-Zag products | | | $ | 132,812 | | | $ | 108,733 | | | | 22.1 | % | | $ | 111,507 | | | | -2.5 | % | Stoker’s products | | | | 115,866 | | | | 99,894 | | | | 16.0 | % | | | 90,031 | | | | 11.0 | % | NewGen products | | | 91,261 | | | | 17,310 | | | | 427.2 | % | | | 17,065 | | | | 1.4 | % | | | 156,433 | | | | 153,362 | | | | 2.0 | % | | | 131,145 | | | | 16.9 | % | Total net sales | | | 285,777 | | | | 206,228 | | | | 38.6 | % | | | 197,256 | | | | 4.5 | % | | | 405,111 | | | | 361,989 | | | | 11.9 | % | | | 332,683 | | | | 8.8 | % | Cost of sales | | | 160,908 | | | | 105,872 | | | | 52.0 | % | | | 100,960 | | | | 4.9 | % | | | 215,475 | | | | 225,243 | | | | -4.3 | % | | | 190,124 | | | | 18.5 | % | Gross profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Smokeless products | | | 42,602 | | | | 38,634 | | | | 10.3 | % | | | 38,521 | | | | 0.3 | % | | Smoking products | | | 57,146 | | | | 57,595 | | | | -0.8 | % | | | 52,842 | | | | 9.0 | % | | Zig-Zag products | | | | 78,232 | | | | 59,386 | | | | 31.7 | % | | | 57,043 | | | | 4.1 | % | Stoker’s products | | | | 61,456 | | | | 52,277 | | | | 17.6 | % | | | 46,490 | | | | 12.4 | % | NewGen products | | | 25,121 | | | | 4,127 | | | | 508.7 | % | | | 4,933 | | | | -16.3 | % | | | 49,948 | | | | 25,083 | | | | 99.1 | % | | | 39,026 | | | | -35.7 | % | Total gross profit | | | 124,869 | | | | 100,356 | | | | 24.4 | % | | | 96,296 | | | | 4.2 | % | | | 189,636 | | | | 136,746 | | | | 38.7 | % | | | 142,559 | | | | -4.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general and administrative expenses | | | 75,369 | | | | 56,771 | | | | 32.8 | % | | | 51,785 | | | | 9.6 | % | | Selling, general, and administrative expenses | | | | 125,563 | | | | 109,887 | | | | 14.3 | % | | | 94,075 | | | | 16.8 | % | Operating income | | | 49,500 | | | | 43,585 | | | | | | | | 44,511 | | | | | | | | 64,073 | | | | 26,859 | | | | 138.6 | % | | | 48,484 | | | | -44.6 | % | Interest expense | | | 16,889 | | | | 26,621 | | | | -36.6 | % | | | 34,284 | | | | -22.4 | % | | Interest expense, net | | | | 20,226 | | | | 17,342 | | | | 16.6 | % | | | 14,819 | | | | 17.0 | % | Investment income | | | (438 | ) | | | (768 | ) | | | -43.0 | % | | | - | | | NM | | | | (198 | ) | | | (2,648 | ) | | | -92.5 | % | | | (424 | ) | | | 524.5 | % | Loss on extinguishment of debt | | | 6,116 | | | | 2,824 | | | | 116.6 | % | | | - | | | NM | | | | - | | | | 1,308 | | | | -100.0 | % | | | 2,384 | | | | -45.1 | % | Net periodic benefit cost (income), excluding service cost | | | | 989 | | | | (4,961 | ) | | | -119.9 | % | | | 131 | | | | -3887.0 | % | Income before income taxes | | | 26,933 | | | | 14,908 | | | | 80.7 | % | | | 10,227 | | | | 45.8 | % | | | 43,056 | | | | 15,818 | | | | 172.2 | % | | | 31,574 | | | | -49.9 | % | Income tax expense (benefit) | | | 7,280 | | | | (12,005 | ) | | | -160.6 | % | | | 1,078 | | | NM | | | Income tax expense | | | | 10,015 | | | | 2,044 | | | | 390.0 | % | | | 6,285 | | | | -67.5 | % | Consolidated net income | | | 19,653 | | | | 26,913 | | | | -27.0 | % | | | 9,149 | | | | 194.2 | % | | $ | 33,041 | | | $ | 13,774 | | | | 139.9 | % | | $ | 25,289 | | | | -45.5 | % | Net loss attributable to non-controlling interest | | | (556 | ) | | | - | | | NM | | | | - | | | NM | | | Net income attributable to Turning Point Brands, Inc. | | $ | 20,209 | | | $ | 26,913 | | | | -24.9 | % | | $ | 9,149 | | | | 194.2 | % | |
Comparison of Year Ended December 31, 2020, to Year Ended December 31, 2019
Net Sales. For the year ended December 31, 2020, overall net sales increased to $405.1 million from $362.0 million for the year ended December 31, 2019, an increase of $43.1 million or 11.9%. The increase in net sales was primarily driven by increased sales volume across all segments.
For the year ended December 31, 2020, net sales in the Zig-Zag Products segment increased to $132.8 million from $108.7 million for the year ended December 31, 2019, an increase of $24.1 million or 22.1%. For the year ended December 31, 2020, Zig-Zag Products volumes increased 19.7%, and price/mix increased 2.4%. The increase in net sales was primarily related to double digit growth in US papers and wraps, partially offset by a $1.8 million decline in non-focus cigars and MYO pipe.
Comparison of Year Ended December 31, 2017, to Year Ended December 31, 2016
Net Sales.For the year ended December 31, 2017, overall2020, net sales in the Stoker’s Products segment increased to $285.8$115.9 million from $206.2$99.9 million for the year ended December 31, 2016,2019, an increase of $79.5$16.0 million or 38.6%16.0%. For the year ended December 31, 2017, volumes2020, Stoker’s Products volume increased 34.2%12.0% and price/mix increased 4.4%4.0%. This increase was substantially due to anThe increase in NewGennet sales was primarily driven by the continuing double-digit volume growth of Stoker’s® MST. Sales in chewing tobacco products saleswere up mid-single digits as compared to prior year. MST represented 59% of Stoker’s Products revenue in 2020, up from 54% a result of the acquisitions of VaporBeast and Vapor Shark.year earlier.
For the year ended December 31, 2017, net sales in the Smokeless products segment increased to $84.6 million from $77.9 million for the year ended December 31, 2016, an increase of $6.6 million or 8.5%. For the year, volume increased 3.4% and price/mix increased 5.1%. Net sales growth was primarily driven by Stoker’s® MST.
For the year ended December 31, 2017, net sales in the Smoking products segment decreased to $110.0 million from $111.0 million for the year ended December 31, 2016, a decrease of $1.0 million or 0.9%. For the year ended December 31, 2017, Smoking products volumes decreased 3.7%, while price/mix increased 2.8%. The decline in net sales is primarily due to reduced investment in the cigar product line to allow for those resources to be used for other product lines with higher margins.
For the year ended December 31, 2017,2020, net sales in the NewGen products segment increased to $91.3$156.4 million from $17.3$153.4 million for the year ended December 31, 2016,2019, an increase of $74.0$3.1 million or 427.2%2.0%. The increase in net sales was primarily the result of growth in both the Nu-X and vape distribution businesses.
Gross Profit. For the year ended December 31, 2017, NewGen products volumes increased 415.8%, while price/mix increased 11.4%. Net sales growth was primarily driven by the acquisitions of VaporBeast and Vapor Shark.
Gross Profit. For the year ended December 31, 2017,2020, overall gross profit increased to $124.9$189.6 million from $100.4$136.7 million for the year ended December 31, 2016,2019, an increase of $24.5$52.9 million or 24.4%38.7%, primarily due to acquisitiongrowth across all segments and $24.2 million of VaporBeast. Gross margin weakenedcosts in 2019 that did not recur primarily related to 43.7%inventory reserves. Consolidated gross profit for the year ended December 31, 2017, from 48.7%2019, included $1.2 million of introductory launch costs and $23.0 million of restructuring costs primarily inventory reserves. Gross profit as a percentage of net sales increased to 46.8% for the year ended December 31, 2016, as a result of2020, from 37.8% for the mix impact of VaporBeast’s inherently lower distribution margins.year ended December 31, 2019.
For the year ended December 31, 2017,2020, gross profit in the Smokeless productsZig-Zag Products segment increased to $42.6$78.2 million from $38.6$59.4 million for the year ended December 31, 2016,2019, an increase of $4.0$18.8 million or 10.3%31.7%. Gross profit as a percentage of net sales increased to 50.4%58.9% of net sales for the year ended December 31, 2017,2020, from 49.6%54.6% of net sales for the year ended December 31, 2016.2019. The increase in gross profit as a percentage of net sales is a result of increased US paper sales and increased margin is due to us being able to take price increases andin MYO cigar sales as a result of the further expansion of Stoker’s® MST sales, leveraging our Smokeless fixed costs across a higher sales volume.Durfort transaction.
For the year ended December 31, 2017,2020, gross profit in the Smoking productsStoker’s Products segment decreasedincreased to $57.1$61.5 million from $57.6$52.3 million for the year ended December 31, 2016, a decrease2019, an increase of $0.4$9.2 million or 0.8%17.6%. Gross profit as a percentage of net sales increased to 52.0%53.0% of net sales for the year ended December 31, 2017,2020, from 51.9%52.3% of net sales for the year ended December 31, 2016.2019. The increase in gross profit as a percentage of net sales is primarily a result of strong incremental margin contribution of MST.
For the year ended December 31, 2017,2020, gross profit in the NewGen products segment increased to $25.1$49.9 million from $4.1$25.1 million for the year ended December 31, 2016,2019, an increase of $21.0$24.9 million or 508.7%99.1%. NewGen gross profit for the year ended December 31, 2019, included $1.2 million of introductory launch costs and $23.2 million of restructuring expenses that did not recur in 2020. Additionally, the gross profit includes $10.1 million of tariff expenses in 2020 compared to $9.3 million in 2019. Gross profit as a percentage of net sales increased to 27.5%31.9% of net sales for the year ended December 31, 2017,2020, from 23.8%16.4% of net sales for the year ended December 31, 2016,2019, primarily as a resultdue to the impact of the change$23.2 million of related write-offs and reserves in product mix in2019 associated with the segment and our continued focus on margin expansion in the NewGen segment.vape distribution business.
Selling, General and Administrative Expenses. For the year ended December 31, 2017,2020, selling, general and administrative expenses increased to $75.4$125.6 million from $56.8$109.9 million for the year ended December 31, 2016,2019, an increase of $18.6$15.7 million or 32.8%, due primarily to acquisitions14.3%. Selling, general, and administrative expenses for the year ended December 31, 2020, included $2.6 million of VaporBeaststock options, restricted stock and Vapor Shark, increased legal cost for anti-counterfeiting initiativesincentives expense, $3.1 million of transaction expenses, $0.5 million of restructuring expenses and $14.4 million of expense related to our Zig-Zag® cigarette papers,PMTA. Selling, general, and administrative expenses for the one-time chargeyear ended December 31, 2019, included $1.8 million of $0.9 milliontransaction costs (primarily relating to purchaseSolace and ReCreation as well as earnout expense for IVG), $5.0 million of the option for the Vapor Shark branded retail stores.introductory launch costs, $3.2 million of restructuring expenses, and $2.2 million in PMTA expenses.
Interest Expense.Expense, net. For the year ended December 31, 2017,2020, interest expense, decreasedon a net basis, increased to $16.9$20.2 million from $26.6$17.3 million for the year ended December 31, 2016,2019, primarily as a result of lower interest ratesthe amortization of the debt discount on the Convertible Senior Notes of $7.0 million for the year ended December 31, 2020 compared to $2.9 million for the year ended December 31, 2019.
Investment Income. For the year ended December 31, 2020, investment income decreased to $0.2 million from our 2017$2.6 million for the year ended December 31, 2019, primarily due to the impact of the $2.0 million gain on the CASH investment as a result of marking the investment to fair value in 2019. See Note 11 Other Assets in the Consolidated Financial Statements for additional information on the CASH investment.
Loss on Extinguishment of Debt. For the year ended December 31, 2020, there was no loss on extinguishment of debt. For the year ended December 31, 2019, loss on extinguishment of debt refinancing.was $1.3 million as the result of paying off the 2018 Second Lien Credit Facility.
Net Periodic Benefit Cost (Income), excluding service cost. For the year ended December 31, 2020, net periodic cost was $0.9 million primarily as a result of the curtailment from the shutdown of the pension plan. For the year ended December 31, 2019, net periodic income was $5.0 million primarily due to the gain on the termination of the postretirement plan.
Income Tax Expense (Benefit).Expense. The Company’s income tax expense of $7.3was $10.0 million, or 27%23.3% of income before income taxes, for the year ended December 31, 2017, is2020, and included a discrete tax deduction of $3.3 million relating to stock option exercises during the year and a discrete tax benefit of $0.6 million from the shutdown of the pension plan. The Company’s income tax expense of $2.0 million, or 12.9% of income before income taxes, for the year ended December 31, 2019, was lower than the expected annual effective tax rate as a result of discrete tax benefits of $4.2$4.6 million from the exercise of stock options during the year.
Consolidated Net Income. Due to the factors described above, net income for the year ended December 31, 2020 and 2019, was $33.0 million and $13.8 million, respectively.
Comparison of Year Ended December 31, 2019, to Year Ended December 31, 2018
Net Sales. For the year ended December 31, 2019, overall net sales increased to $362.0 million from $332.7 million for the year ended December 31, 2018, an increase of $29.3 million or 8.8%. The increase in net sales was primarily driven by Stoker’s MST, Zig-Zag cigar wraps, and Nu-X including the acquisition of Solace in 2019.
For the year ended December 31, 2019, net sales in the Zig-Zag Products segment decreased to $108.7 million from $111.5 million for the year ended December 31, 2018, a decrease of $2.8 million or 2.5%. For the year ended December 31, 2019, Zig-Zag Products volumes decreased 4.9%, while price/mix increased 2.4%. The decrease in net sales is primarily due to the delay of Canadian paper orders in the first half of the year as a result of the new packaging regulations in Canada as well as our strategic decision to de-emphasize the low margin cigar and MYO / pipe products businesses. Cigar and MYO / pipe product sales declined by $2.4 million to $7.2 million in the year ended December 31, 2019.
For the year ended December 31, 2019, net sales in the Stoker’s Products segment increased to $99.9 million from $90.0 million for the year ended December 31, 2018, an increase of $9.9 million or 11.0%. For the year ended December 31, 2019, Stoker’s Products volume increased 7.3% and price/mix increased 3.7%. The increase in net sales was primarily driven by the continuing growth of Stoker’s® MST partially offset by declines in chewing tobacco attributable to increased competition, our promotional timing, and a continuing segment shift to lower price products. MST represented 54% of Stoker’s Products revenue in 2019, up from 47% a year earlier.
For the year ended December 31, 2019, net sales in the NewGen products segment increased to $153.4 million from $131.1 million for the year ended December 31, 2018, an increase of $22.2 million or 16.9%. The increase in net sales was primarily driven by higher Nu-X alternative products sales in 2019 (includes the Solace acquisition) and an additional eight months of IVG net sales in 2019. Net sales were negatively impacted by the vape disruption in the fourth quarter of 2019.
Gross Profit. For the year ended December 31, 2019, overall gross profit decreased to $136.7 million from $142.6 million for the year ended December 31, 2018, a decrease of $5.8 million or 4.1%, primarily as a result of certain restructuring activities in the fourth quarter 2019. Consolidated gross profit for the year ended December 31, 2019, included $0.4 million of unfavorable LIFO adjustments, $1.2 million of introductory launch costs, and $23.0 million of restructuring costs, primarily inventory reserves, compared to $0.1 million, $1.0 million, and $2.9 million, respectively, in the year ended December 31, 2018. Gross profit as a percentage of net sales weakened to 37.8% for the year ended December 31, 2019, from 42.9% for the year ended December 31, 2018, primarily due to the aforementioned restructuring expenses, including the inventory reserves and write-off associated with our pivot from third-party vaping products.
For the year ended December 31, 2019, gross profit in the Zig-Zag Products segment increased to $59.4 million from $57.0 million for the year ended December 31, 2018, an increase of $2.3 million or 4.1%. Zig-Zag Products gross profit for the year ended December 31, 2018 included $0.6 million of introductory launch costs and $1.3 million of line rationalization expenses. Gross profit as a percentage of net sales increased to 54.6% of net sales for the year ended December 31, 2019, from 51.2% of net sales for the year ended December 31, 2018. The increase in gross profit as a percentage of net sales is primarily due to declining sales of lower margin, low priority products.
For the year ended December 31, 2019, gross profit in the Stoker’s Products segment increased to $52.3 million from $46.5 million for the year ended December 31, 2018, an increase of $5.8 million or 12.4%. Stoker’s Products gross profit for the year ended December 31, 2019, included $0.3 million of unfavorable LIFO adjustments and $0.0 million of introductory launch costs compared to $0.1 million and $0.2 million, respectively, for the year ended December 31, 2018. Gross profit as a percentage of net sales increased to 52.3% of net sales for the year ended December 31, 2019, from 51.6% of net sales for the year ended December 31, 2018 driven by Stoker MST gains.
For the year ended December 31, 2019, gross profit in the NewGen products segment decreased to $25.1 million from $39.0 million for the year ended December 31, 2018, a decrease of $13.9 million or 35.7%. NewGen gross profit for the year ended December 31, 2019, included $1.2 million of introductory launch costs and $23.2 million of restructuring expenses compared to $0.3 million and $1.5 million, respectively, for the year ended December 31, 2018. Additionally, gross profit includes $9.3 million of tariff expenses in 2019 compared to $1.1 million in 2018. Gross profit as a percentage of net sales decreased to 16.4% of net sales for the year ended December 31, 2019, from 29.8% of net sales for the year ended December 31, 2018, primarily due to the aforementioned restructuring expenses associated with our pivot from third-party vaping products.
Selling, General and Administrative Expenses. For the year ended December 31, 2019, selling, general and administrative expenses increased to $109.9 million from $94.1 million for the year ended December 31, 2018, an increase of $15.8 million or 16.8%. Selling, general, and administrative expenses for the year ended December 31, 2019, included $1.7 million of expenses relating to the inclusion of our 2019 investment in Solace, $1.8 million of transaction costs (primarily relating to Solace and ReCreation as well as earnout expense for IVG), $5.0 million of introductory launch costs, $3.2 million of restructuring expenses, and $2.2 million in PMTA expenses. Selling, general, and administrative expenses for the year ended December 31, 2018, included $4.5 million of transaction and strategic initiative costs (primarily relating to IVG and Vapor Supply transaction costs), $0.9 million of company-wide introductory launch costs, and $1.8 million of restructuring costs.
Interest Expense, net. For the year ended December 31, 2019, interest expense, on a net basis, increased to $17.3 million from $14.8 million for the year ended December 31, 2018, primarily as a result of the amortization of the discount on the Convertible Senior Notes in 2019 of $2.9 million.
Investment Income. For the year ended December 31, 2019, investment income increased to $2.6 million from $0.4 million for the year ended December 31, 2018, primarily due to the $2.0 million gain on the CASH investment as a result of marking the investment to fair value.
Loss on Extinguishment of Debt. For the year ended December 31, 2019, loss on extinguishment of debt was $1.3 million as the result of paying off the 2018 Second Lien Credit Facility. For the year ended December 31, 2018, loss on extinguishment of debt was $2.4 million as the result of refinancing our credit facility in the first quarter of 2018.
Net periodic benefit (income) cost, excluding service cost. For the year ended December 31, 2019, net periodic income was $5.0 million primarily due to the gain on the termination of the postretirement plan. For the year ended December 31, 2018, net periodic benefit cost was $0.1 million.
Income Tax Expense. The Company’s income tax expense of $2.0 million, or 12.9% of income before income taxes, for the year ended December 31, 2019, was lower than the expected annual effective tax rate as a result of discrete tax benefits of $4.6 million from the exercise of stock options during the year. The Company’s income tax expense of $6.3 million, or 19.9% of income before income taxes, for the year ended December 31, 2016, does not bear2018, was lower than the normal relationship to income before income taxes primarily due to releasing the valuation allowance on our deferred taxesexpected annual effective tax rate as we determined that it is more-likely than not that we will realize our deferred tax assets which consist primarily of a federal net operating loss (“NOL”) carryforward.
Investment Income. For the year ended December 31, 2017 and 2016, investment income relating to investments of the MSA escrow deposits was $0.4 million and $0.8 million, respectively.
Loss on Extinguishment of Debt. For the year ended December 31, 2017, loss on extinguishment of debt was $6.1 million as the result of refinancing our credit facility indiscrete tax benefits of $5.4 million from the first quarterexercise of 2017. Forstock options during the year ended December 31, 2016, loss on extinguishment of debt was $2.8 million as the result of retiring certain debt with proceeds from our IPO.year.
Consolidated Net Income. Due to the factors described above, net income for the year ended December 31, 20172019 and 2016,2018, was $19.7$13.8 million and $26.9$25.3 million, respectively.
Net Loss AttributableEBITDA and Adjusted EBITDA
To supplement our financial information presented in accordance with U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to Non-Controlling Interest. Net loss attributable to non-controlling interest of $0.6 million for the year ended December 31, 2017, is related to Vapor Shark, which was accounted for as a VIE during the second quarter of 2017.
Net Income Attributable to Turning Point Brands, Inc. Due to the factors described above, net income for the year ended December 31, 2017management and 2016, was $20.2 millioninvestors regarding certain financial and $26.9 million, respectively.
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
Net Sales. For the year ended December 31, 2016, overall net sales increased to $206.2 million from $197.3 million in the year ended December 31, 2015, an increase of $9.0 million, or 4.5% as a result of increases in all our segments.
For the year ended December 31, 2016, net sales in the Smokeless products segment increased to $77.9 million from $74.3 million in the year ended December 31, 2015, an increase of $3.6 million, or 4.9%. Net sales growth was principally driven by MST. Given the disparity between chew and MST case prices (average chew case price is 2.5 times that of MST), for the year ended December 31, 2016, volume increased 0.2% and price/mix increased 4.6%. Volume was adversely impacted by the October 1, 2016, Pennsylvania state excise tax increase.
For the year ended December 31, 2016, net sales in the Smoking products segment increased to $111.0 million from $105.9 million in the year ended December 31, 2015, an increase of $5.1 million, or 4.8%. Net sales growth was driven by continued growth in our MYO cigar wraps and the roll-out of Zig-Zag® cigarillo size wraps, which was somewhat offset by cigar declines. For the year ended December 31, 2016, volume increased 1.6% and price/mix increased 3.2%.
For the year ended December 31, 2016, net sales in the NewGen products segment increased to $17.3 million from $17.1 million in the year ended December 31, 2015, an increase of $0.2 million or 1.4% due to the inclusion of one month of VaporBeast net sales partially offset by declines in existing NewGen products. For the year ended December 31, 2016, volume increased 4.9% and price/mix decreased 3.5%.
Gross Profit. For the year ended December 31, 2016, overall gross profit increased to $100.4 million from $96.3 million for the year ended December 31, 2015, an increase of $4.1 million, or 4.2%, principally due to an increase in gross profit in the Smoking products segment, partially offset by a decrease in gross profit in the NewGen products segment.
For the year ended December 31, 2016, gross profit in the Smokeless products segment increased to $38.6 million from $38.5 million for the year ended December 31, 2015, an increase of $0.1 million, or 0.3%. Gross margin for this segment as a percentage of net sales decreased to 49.6% of net sales for the year ended December 31, 2016, from 51.9% in the year ended December 31, 2015, as MST, which is lower margin compared to chew, became a bigger portion of the segment sales. Gross profit was negatively impacted by non-cash inventory adjustments as a result of LIFO.
For the year ended December 31, 2016, gross profit in the Smoking products segment increased to $57.6 million from $52.8 million for the year ended December 31, 2015, an increase of $4.8 million, or 9.0%. Gross margin for this segment as a percentage of net sales increased to 51.9% of net sales for the year ended December 31, 2016, from 49.9% for the year ended December 31, 2015 as selling prices increased at a faster rate than the cost of the goods.
For the year ended December 31, 2016, gross profit in the NewGen products segment decreased to $4.1 million from $4.9 million for the year ended December 31, 2015, a decrease of $0.8 million, or 16.3%. Gross margin for this segment as a percentage of net sales decreased to 23.8% of net sales for the year ended December 31, 2016, from 28.9% for the year ended December 31, 2015, as increased product returns in 2016 led to higher costs.
Selling, General and Administrative Expenses. For the year ended December 31, 2016, selling, general, and administrative expenses increased to $56.8 million from $51.8 million for the year ended December 31, 2015, an increase of $5.0 million, or 9.6%, due to increases in sales and marketing infrastructure, primarily due to increased headcount, IPO related compensation, transaction costsbusiness trends relating to our acquisitions, increased legalfinancial condition and litigationresults of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance. In addition, our debt instruments contain covenants which use Adjusted EBITDA calculations.
We define “EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, and the inclusionamortization. We define “Adjusted EBITDA” as net income before interest expense, loss on extinguishment of one monthdebt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of VaporBeast expenses.ongoing operating performance.
Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The table below provide a reconciliation between net income and Adjusted EBITDA.
Interest Expense and Financing Costs. For the year ended December 31, 2016, interest expense and amortization of deferred financing costs decreased to $26.6 million from $34.3 million for the year ended December 31, 2015, a decrease of $7.7 million, or 22.4%, due to the pay-down of debt as a result of the IPO.
(in thousands) | | Years ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Consolidated net income | | $ | 33,041 | | | $ | 13,774 | | | $ | 25,289 | | Add: | | | | | | | | | | | | | Interest expense, net | | | 20,226 | | | | 17,342 | | | | 14,819 | | Loss on extinguishment of debt | | | - | | | | 1,308 | | | | 2,384 | | Income tax expense | | | 10,015 | | | | 2,044 | | | | 6,285 | | Depreciation expense | | | 3,237 | | | | 2,638 | | | | 2,105 | | Amortization expense | | | 1,781 | | | | 1,451 | | | | 1,006 | | EBITDA | | $ | 68,300 | | | $ | 38,557 | | | $ | 51,888 | | Components of Adjusted EBITDA | | | | | | | | | | | | | Other (a) | | | 1,342 | | | | 360 | | | | 366 | | Stock options, restricted stock, and incentives expense (b) | | | 2,555 | | | | 4,626 | | | | 1,410 | | Transactional expenses and strategic initiatives (c) | | | 3,087 | | | | 1,764 | | | | 4,482 | | New product launch costs (d) | | | - | | | | 6,185 | | | | 1,835 | | FDA PMTA (e) | | | 14,435 | | | | 2,153 | | | | - | | Corporate and vapor restructuring (f) | | | 517 | | | | 19,214 | | | | 4,629 | | Vendor settlement (g) | | | - | | | | (5,522 | ) | | | - | | Adjusted EBITDA | | $ | 90,236 | | | $ | 67,337 | | | $ | 64,610 | |
Investment Income. In 2016, we began to invest the MSA escrow deposits. For the year ended December 31, 2016, investment income was $0.8 million relating to these investments.
(a) Represents LIFO adjustment, non-cash pension expense (income) and foreign exchange hedging. | (b) Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units. | (c) Represents the fees incurred for transaction expenses and strategic initiatives. | (d) Represents product launch costs for our new product lines. | (e) Represents costs associated with applications related to FDA premarket tobacco product application (“PMTA”). | (f) Represents costs associated with corporate and vapor restructuring including severance and inventory reserves. Costs during the year ended December 31, 2020 represent the costs from the retirement of a senior executive. | (g) Represents net gain associated with the settlement of a vendor contract. |
Loss on Extinguishment of Debt. For the year ended December 31, 2016, loss on extinguishment of debt was $2.8 million as the result of retiring certain debt with proceeds from the IPO.
Income Tax Expense (Benefit). For the year ended December 31, 2016, income tax benefit was $12.0 million primarily due to releasing the valuation allowance as we determined that it is more-likely than not that we will realize our deferred tax assets which consist primarily of an NOL carryforward. For the year ended December 31, 2015, income tax expense was $0.4 million primarily for state income taxes as federal income taxes were offset by our NOL carryforward.
Net Income. For the year ended December 31, 2016, net income increased to $26.9 million from $9.1 million in the year ended December 31, 2015, an increase of $17.8 million for the reasons set forth above.
Liquidity and Capital ReservesResources
Our principal uses for cash are working capital, debt service, and capital expenditures. We believe our cash flows from operations and borrowing availability under our 2018New Revolving Credit Facility (as defined herein) are adequate to satisfy our operating cash requirements for the foreseeable future.
Our working capital, which we define as current assets less cash and current liabilities, increased $4.0$20.8 million to $41.3$58.9 million at December 31, 2017,2020, compared with $37.3$38.1 million at December 31, 2016.2019. The increase in working capital is primarily due to increases in accounts receivable, inventory and accrued liabilities as a result ofdue to increased sales offset by decreases in accounts payable and our revolving credit facility balance as the 2016 revolving credit facility balance was abnormally high due to the acquisition of VaporBeast in November 2016.other current assets.
(in thousands) | | 2017 | | | 2016 | | | | | | | | | Current Assets | | $ | 79,493 | | | $ | 78,856 | | Current Liabilities | | | 38,230 | | | | 41,567 | | Working Capital | | $ | 41,263 | | | $ | 37,289 | |
| | As of | | (in thousands) | | December 31, | | | December 31, | | | | 2020 | | | 2019 | | | | | | | | | Current assets | | $ | 115,532 | | | $ | 94,000 | | Current liabilities | | | 56,629 | | | | 55,886 | | Working capital | | $ | 58,903 | | | $ | 38,114 | |
During the year ended December 31, 2017,2020 and 2019, we invested $2.0$6.1 million and $4.8 million, respectively, in capital expenditures. We had unrestricted cash on hand of $2.6$41.8 million and $2.9$95.3 million as of December 31, 20172020 and 2016,2019, respectively. We had restricted assets of $30.8$35.1 million and $30.4$32.1 million as of December 31, 20172020 and 2016,2019, respectively. Restricted assets consist of escrow deposits under the MSA.MSA and insurance deposits. On the 25th anniversary of each annual deposit, we are entitled to receive reimbursement of the principal amount of escrow remaining for that year. See “Master Settlement Agreement” below for details.
Cash Flows from Operating Activities
For the year ended December 31, 2017, net cash provided by operating activities increased to $29.7 million from $9.1 million for the year ended December 31, 2016, an increase of $20.6 million or 225.3%, principally due to an increase in pre-tax income of $12.0 million as we currently do not pay federal income taxes and interest paid on the PIK Toggle Notes in 2016, which did not recur.
For the year ended December 31, 2016, net cash provided by operating activities decreased to $9.1 million from $24.4 million for the year ended December 31, 2015, a decrease of $15.3 million, or 62.6%, principally due to increases in inventory and accounts payable.
Cash Flows from Investing Activities
For the year ended December 31, 2017, net cash used in investing activities decreased to $1.9 million from $26.8 million for the year ended December 31, 2016, a decrease of $24.9 million or 92.8%, principally due to the 2016 acquisitions of VaporBeast, certain brands from Wind River, and the land and building in Dresden, Tennessee.
For the year ended December 31, 2016, net cash used in investing activities increased to $26.8 million from $2.0 million for the year ended December 31, 2015, an increase of $24.8 million or 1240.0%, principally due to the 2016 acquisitions of VaporBeast, certain brands from Wind River, and the land and building in Dresden, Tennessee.
Cash Flows from FinancingOperating Activities
For the year ended December 31, 2017, net cash used by financing activities was $28.0 million compared with2020, net cash provided by financingoperating activities of $15.7increased to $43.7 million from $37.8 million for the year ended December 31, 2016, a decrease2019, an increase of $43.8$5.9 million or 278.1%16%, principallyprimarily due to proceeds fromhigher net income due to increased sales offset by the issuancetiming of stock from our IPOchanges in May 2016 and refinancing costs associated with the 2017 Credit Facility in 2017.working capital.
For the year ended December 31, 2016,2019, net cash provided by financingoperating activities was $15.7 increased to $37.8 million compared with net cash used of $26.0 from $13.1 million for the year ended December 31, 2015,2018, an increase of $41.8$24.7 million principallyor 189%, primarily due to inventory buys in 2018 that reduced cash flow.
Cash Flows from Investing Activities
For the year ended December 31, 2020, net cash used in investing activities was $64.8 million compared to net cash provided by investing activities of $15.9 million for the year ended December 31, 2019, a decrease of $80.7 million or 508%, primarily due to increases in cash paid for acquisitions and investments in 2020.
For the year ended December 31, 2019, net cash provided by investing activities was $15.9 million compared to cash used in investing activities of $24.7 million for the year ended December 31, 2018, an increase of $40.6 million or 164%, primarily due to the change in MSA escrow deposits from investments to cash holdings as well as lower cash paid for acquisitions.
Cash Flows from Financing Activities
For the year ended December 31, 2020, net cash used in financing activities was to $29.3 million compared to net cash provided by financing activities $68.0 million for the year ended December 31, 2019, a decrease of $97.3 million or 143%, primarily due to lapping the net proceeds from the issuance of stock, partiallythe Convertible Senior Notes and the payment of the revolving credit facility and second lien term loan in 2019.
For the year ended December 31, 2019, net cash provided by financing activities increased to $68.0 million from $9.9 million for the year ended December 31, 2018, an increase of $58.0 million or 584%, primarily due to the proceeds from the issuance of the Convertible Senior Notes offset by payments on a prior credit facility, PIK Toggle Notes,the 2018 Revolving Credit Facility, the 2018 Second Lien Credit Facility and redemption of warrants issued by Intrepid.payment for the call options.
Long-Term Debt
Notes payable and long-term debt consisted of the following at December 31, 2020 and 2019, in order of preference:
| | December 31, 2020 | | | December 31, 2019 | | 2018 First Lien Term Loan | | $ | 130,000 | | | $ | 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 | | | 319,985 | | | | 322,740 | | Less deferred finance charges | | | (4,940 | ) | | | (6,466 | ) | Less debt discount | | | (25,083 | ) | | | (32,083 | ) | Less current maturities | | | (12,000 | ) | | | (15,240 | ) | Net notes payable and long-term debt | | $ | 277,962 | | | $ | 268,951 | |
As noted above under “—Recent Developments—Senior Secured Notes and New Revolving Credit Facility,” on February 11, 2020 the Company completed a comprehensive refinancing transaction pursuant to which the Company issued $250 million of its 5.625% senior secured notes due 2026 and entered into the New Revolving Credit Facility. The proceeds from the Offering of the Senior Secured Notes were used to (i) to repay all obligations under and terminate the 2018 First Lien Term Loan and 2018 First Lien Revolver, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.
Senior Secured Notes
The Senior Secured Notes mature on February 15, 2026 and bear interest at a rate of 5.625% per annum. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.
Obligations under the Senior Secured Notes are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (the “Guarantors”) that guarantee any Credit Facility (as defined in the Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”), including the New Revolving Credit Facility, or capital markets debt securities of the Company or Guarantors in excess of $15.0 million. The Senior Secured Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions. The New Revolving Credit Facility is secured on a pari passu basis with the Senior Secured Notes.
The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium. Thereafter, the Company may redeem the Senior Secured Notes, in whole or in part, at established redemption prices, plus accrued and unpaid interest, if any. In addition, on or prior to February 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625%, plus accrued and unpaid interest, if any to the redemption date; provided, however, that at least 50% of the original aggregate principal amount of the Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remains outstanding. In addition, at any time and from time to time prior to February 15, 2023, but not more than once in any twelve-month period, the Company may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes at a redemption price (expressed as a percentage of the principal amount thereof) of 103% plus accrued and unpaid interest of the Senior Secured Notes, if any to but not including the redemption date, on the Senior Secured Notes to be redeemed.
If the Company experiences a change of control (as defined in the Senior Secured Notes Indenture), the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest.
The Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Indenture.
The Indenture provides for customary events of default.
New Revolving Credit Facility
In connection with the Offering of the Senior Secured Notes, the Company entered into the New Revolving Credit Facility with the lenders party thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The New Revolving Credit Facility provides for a revolving line of credit up to $25.0 million. Letters of credit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). The Company has not drawn any borrowings under the New Revolving Credit Facility but does have letters of credit of approximately $3.6 million outstanding under the facility.
The New Revolving Credit Facility will mature on August 11, 2025 if none of the Company’s 2.50% Convertible Senior Notes (the “Convertible Senior Notes”) are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.
Interest is payable on the New Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging). The Company also has the option borrow at a rate determined by reference to the base rate.
The obligations under the New Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the New Revolving Credit Facility are secured on a pari passu basis with the Notes.
The New Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The New Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the New Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the New Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5,000,000) exceeds 35% of the total commitments under the New Revolving Credit Facility.
The New Revolving Credit Agreement provides for customary events of default.
2018 Credit Facility
On February 17, 2017, weMarch 7, 2018, the Company entered into a new $250$250 million secured credit facility comprisedconsisting of (i) a $160 million 2018 First Lien Term Loan and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit FacilityFacility”), in each case, with Fifth Third Bank, as administrative agent, and other lenders, (the “2017 First Lien Credit Facility”) and (ii) in addition to a Second Lien Credit Facility with Prospect Capital Corporation, as administrative agent, and other lenders (the “2017 Second Lien Credit Facility,” and together with the 2017 First Lien Credit Facility, the “2017 Credit Facility”). We used the proceeds of the 2017 Credit Facility to repay, in full, our prior credit facility and to pay related fees and expenses.
The 2017 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2017 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2017 Credit Facility, restrict our ability: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments.
As of December 31, 2017, we were in compliance with the financial and restrictive covenants of the 2017 Credit Facility. The following table provides outstanding balances under our debt instruments.
| | December 31, | | | | 2017 | | | 2016 | | 2017 Revolving Credit Facility | | $ | 8,000 | | | $ | - | | 2017 First Lien First Out Term Loan | | | 105,875 | | | | - | | 2017 First Lien Second Out Term Loan | | | 34,738 | | | | - | | 2017 Second Lien Term Loan | | | 55,000 | | | | - | | Notes payable - VaporBeast | | | 2,000 | | | | 2,000 | | Revolving Credit Facility | | | - | | | | 15,034 | | First Lien Term Loan | | | - | | | | 146,451 | | Second Lien Term Loan | | | - | | | | 59,128 | | | | | 205,613 | | | | 222,613 | | Less deferred financing charges | | | (3,573 | ) | | | (4,388 | ) | Less revolving credit facility | | | (8,000 | ) | | | (15,034 | ) | Less current maturities of long-term debt | | | (7,850 | ) | | | (1,650 | ) | Notes payable and long-term debt | | $ | 186,190 | | | $ | 201,541 | |
2017 First Lien Credit Facility
The 2017 First Lien Credit Facility consists of: (i) a $50 million revolving credit facility (the “2017 Revolving Credit Facility”), (ii) a $110 million first out term loan facility (the “2017 First Out Term Loan”), and (iii) a $35 million second out term loan facility (the “2017 Second Out Term Loan”), which will be repaid in full only after repayment in full of the 2017 First Out Term Loan. The 2017 First Lien Credit Facility also includes an accordion feature allowing us to borrow up to an additional $40 million upon the satisfaction of certain conditions, including obtaining commitments from one or more lenders. Borrowings under the 2017 Revolving Credit Facility can be used for general corporate purposes, including acquisitions.
The 2017 First Out Term Loan and the 2017 Revolving Credit Facility have a maturity date of February 17, 2022, and the 2017 Second Out Term Loan has a maturity date of May 17, 2022. The 2017 First Out Term Loan and the 2017 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.5% to 3.5% based on our senior leverage ratio. The 2017 First Out Term Loan has quarterly required payments of $1.4 million beginning June 30, 2017, increasing to $2.1 million on June 30, 2019, and increasing to $2.8 million on June 30, 2021. The 2017 Second Out Term Loan bears interest at LIBOR plus 6% (subject to a floor of 1.00%). The 2017 Second Out Term Loan has quarterly required payments of $0.1 million beginning June 30, 2017. The 2017 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.75x with step-downs to 3.00x, a maximum total leverage ratio of 4.75x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x. The weighted average interest rate at December 31, 2017, on the 2017 Revolving Credit Facility was 5.05%. The weighted average interest rate at December 31, 2017, on the 2017 First Out Term Loan was 4.61%. The weighted average interest rate at December 31, 2017, on the 2017 Second Out Term Loan was 7.61%.
2017 Second Lien Credit Facility
The 2017 Second Lien Credit Facility consists of a $55 million second lien term loan (the “2017 Second Lien Term Loan”) having a maturity date of August 17, 2022. The 20172018 Second Lien Term Loan bears interest at a fixed rate of 11%. The 2017 Second Lien Credit Facility contains certain financial covenants including a maximum senior leverage ratio of 4.25x with step-downs to 3.50x, a maximum total leverage ratio of 5.25x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x.
Note Payable – VaporBeast
On November 30, 2016, we issued a note payable to VaporBeast’s former shareholders (“VaporBeast Note”). The VaporBeast Note is $2.0 million principal with 6% interest compounded monthly and matures on May 30, 2018. The VaporBeast Note may be prepaid at any time without penalty and is subject to a late-payment penalty of 5% and a default rate of 13% per annum. The VaporBeast Note is subject to customary defaults including defaults for nonpayment, nonperformance, any material breach under (the purchase agreement, and bankruptcy or insolvency.
First Lien Term Loan
All of NATC’s subsidiaries, as well as Turning Point Brands, Inc,, were guarantors under the First Lien Term Loan. TPLLC and its sole subsidiary at the date of the agreement, Intrepid, were not guarantors of the First Lien Term Loan. The First Lien Term Loan was secured by a first-priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of the capital stock of NATC or any guarantor, other than certain excluded assets (the “Collateral”). The loans designated as LIBOR loans bore interest at the LIBOR then in effect (but not less than 1.25%) plus 6.50%, and the loans designated as base rate loans bore interest at (i) the highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00%, and (D) 2.25% per year plus (ii) 5.50%. The First Lien Term Loan was paid in full with proceeds from the 2017 Credit Facility.
Second Lien Term Loan
The Second Lien Term Loan was secured by a second priority security interest in the Collateral and was guaranteed by the same entities as the First Lien Term Loan. Under the Second Lien Term Loan, the loans designated as LIBOR loans bore interest at LIBOR then in effect (but not less than 1.25%) plus 10.25%. The loans designated as base rate loans bore interest at (i) the highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00%, and (D) 2.25% per year plus (ii) 9.25%. The Second Lien Term Loan was paid in full with proceeds from the 2017 Credit Facility.
Revolving Credit Facility
The Revolving Credit Facility provided for aggregate commitments of up to $40 million subject to a borrowing base, which was calculated as the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (A) the product of 70% and the value of eligible inventory or (B) the product of 85%, the net recovery percentage identified in the most recent inventory appraisal, and the value of eligible inventory, plus (iii) the lesser of (A) the product of 75% and the value of eligible inventory or (B) the product of 85%, the net recovery percentage identified in the most recent inventory appraisal, and the value of the eligible finished goods inventory, minus (iv) the aggregate amount of reserves established by the administrative agent. The outstanding balance on the Revolving Credit Facility was paid in full with proceeds from the 2017 Credit Facility.
PIK Toggle Notes
On January 13, 2014, we issued PIK Toggle Notes (“PIK Toggle Notes”) to Standard General Master Fund, L.P. (“Standard General”), with a principal amount of $45 million and warrants to purchase 42,424 of our common stock at $.01 per share, as adjusted for stock splits and other events specified in the agreement. After adjustment for the stock split effected in connection with the IPO of 10.43174381 to 1, the warrants provided for the purchase of 442,558 of our common stock. Due to the issuance of the warrants the PIK Toggle Notes had an original issue discount of $1.7 million and were initially valued at $43.3 million. The PIK Toggle Notes were scheduled to mature, and the warrants to expire, on January 13, 2021.
The PIK Toggle Notes accrued interest based on LIBOR then in effect (but not less than 1.25%) plus 13.75%. Interest was payable on the last day of each quarter and upon maturity. We had the flexibility to pay interest in kind through an increase in the principal amount at the same interest rate as the PIK Toggle Notes. We chose to increase the PIK Toggle Notes for all interest for the first three months of 2016.
In connection with the IPO, in May 2016, we redeemed and retired all of the outstanding PIK Toggle Notes in exchange for a combination of cash and shares of our voting common stock. As a result of this transaction, we incurred a loss on extinguishment of debt of $2.8 million during the second quarter of 2016. The warrants were exercised during 2016.
7% Senior Notes
In January 2014, we issued 7% Senior Notes to various stockholders with a principal amount of $11 million and warrants to purchase 11,000,000 units of membership interests in Intrepid, which represented 40% of the Intrepid Common Units outstanding on a fully diluted basis, at a purchase price of $1.00 per unit. Due to the issuance of the Intrepid warrants, the 7% Senior Notes had an original issue discount of $2.8 million and were initially valued at $8.2 million. The 7% Senior Notes were scheduled to mature, and the warrants to expire, on December 31, 2023.
The 7% Senior Notes accrued interest at a fixed rate of 7% per annum. The 7% Senior Notes were general unsecured obligations and ranked equally with our other unsecured and unsubordinated debt from time to time outstanding. Redemptions of the 7% Senior Notes could be made by us at any time without penalty or premium.
In connection with the IPO, in May 2016, we redeemed and retired all of the outstanding 7% Senior Notes and warrants in exchange for shares of our voting common stock.
Subsequent Event - Refinancing
On March 7, 2018, we entered into an agreement with Fifth Third Bank, as administrative agent, and other lenders (the “2018 First Lien Credit Facility”) and an agreement with Prospect Capital Corporation, as administrative agent, and other lenders (the “2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”), to amend with Prospect Capital Corporation, as administrative agent, and extendother lenders. The 2018 Credit Facility retained the $40 million accordion feature of the 2017 Credit Facility. We are still evaluatingProceeds from the impact of2018 Credit Facility were used to repay, in full, the transaction; however, we expect2017 Credit Facility. The Company incurred a loss on extinguishment of debt of approximately $2.4 million in the first quarter of 2018.
2018 as a result of the refinancing. The $250 million 2018 Credit Facility consistswas repaid in full and terminated with the proceeds of the Offering of the Senior Secured Notes.
The 2018 First Lien Credit Facility, with a $50 million Revolving Credit Facility and a $160 million First Lien Term Loan and the 2018 Second Lien Credit Facility with a $40 million Second Lien Term Loan. The maturity of the First Lien Term Loan was extended to March 7, 2023, and the maturity of the Second Lien Term Loan was extended to March 7, 2024. The 2018 First Lien Credit Facility retains the accordion feature allowing the Company to borrow up to an additional $40 million upon the satisfaction of certain conditions, including obtaining commitments from one or more lenders. Borrowings under the Revolving Credit Facility may be used for general corporate purposes, including acquisitions.
The 2018 Credit Facility repaid the 2017 Second Out Term Loan, which had an interest rate of LIBOR plus 6% (subject to a floor of 1.00%) and required quarterly required payments of $0.1 million. The amendment also repaid $15 million of the 2017 Second Lien Term Loan.
The 2018 First Lien Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on the Company’sour senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $1.9$2.0 million beginning June 30, 2018, increasing to $2.9$3.0 million on June 30, 2020, and increasing to $3.9$4.0 million on June 30, 2022. The 2018 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratiohas a maturity date of 3.50x with step-downs to 3.00x, a maximum total leverage ratioMarch 7, 2023. The weighted average interest rate of 4.50x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x.the 2018 First Lien Term Loan was 2.9% at December 31, 2020. At December 31, 2020, we had no borrowings outstanding under the 2018 Revolving Credit Facility.
2018 Second Lien Credit Facility:The 2018 Second Lien Credit Facility bearsbore interest at a rate of LIBOR plus 7.00%. The and had a maturity date of March 7, 2024. Based on an excess cash covenant for the facility, a $4.5 million principal payment was made in the second quarter 2019, resulting in $0.2 million loss on extinguishment of debt. We used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Credit Facility containsin the third quarter 2019. The principal paid in the third quarter 2019 amounted to $35.5 million, and the transaction resulted in a $1.1 million loss on extinguishment of debt.
Convertible Senior Notes
In July 2019 we closed an offering of $172.5 million in aggregate principal amount of our 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations.
The Convertible Senior Notes are convertible into approximately 3,202,808 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.567 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon conversion, we may pay cash, shares of our common stock or a combination of cash and stock, as determined by us at our discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of December 31, 2020.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, we separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Convertible Senior Notes and the fair value of the liability component of the Convertible Senior Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”), $35.0 million, will be amortized to interest expense using an effective interest rate of 7.5% over the expected life of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the criteria for equity classification. Interest expense includes $7.0 million and $2.9 million of amortization for the years ended December 31, 2020 and 2019, respectively.
In accounting for the debt issuance costs related to the issuance of the Convertible Senior Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to the interest expense using the effective interest method over the expected life of the Convertible Senior Notes, $4.7 million, and the debt issuance costs attributable to the equity component, $1.2 million, are netted with the equity component of stockholders’ equity (deficit).
In connection with the Convertible Senior Notes offering, we entered into privately negotiated capped call transactions with certain financial covenants includinginstitutions. The capped call transactions have a maximum senior leverage ratiostrike price of 4.00x with step-downs to 3.50x, a maximum total leverage ratio of 5.00x with step-downs to 4.50x,$53.86 per and a minimum fixed charge coverage ratiocap price of 1.10x.$82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. We paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.
Promissory Note
On June 10, 2020, in connection with the acquisition of certain Durfort assets, we issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of $10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount is payable in two $5.0 million installments, with the first installment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment is subject to reduction for certain amounts payable to us as a holdback.
Unsecured Loan
On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020, National Tobacco Company, L.P., a wholly-owned subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan. The proceeds of the loan were received on April 27, 2020. The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.
Note Payable – IVG
In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note has a principal amount of $4.0 million, with an annual interest rate of 6.0% compounding annually and matures on March 5, 2020. All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account pending agreement with the sellers of any indemnification obligations.
Distribution Agreements
For a description of our material distribution agreements, see “Business—Distribution and Supply Agreements.” Master Settlement Agreement
On November 23, 1998, the major U.S. cigarette manufacturers, Philip Morris USA, Inc., Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company and R.J. Reynolds Tobacco Company, entered into the MSA with attorneys general representing states that agreed to settle certain recovery actions (the “Settling States”). In order to be in compliance with the MSA and subsequent states’ statutes, we were required to fund an escrow account with each of the Settling States based on the number of cigarettes or cigarette equivalents (which is measured by pounds of MYO cigarette smoking tobacco) sold in such state. Funding of the escrow deposit by us in 20172018 was less than $0.1 million in respect of sales of smoking products in 2017. We estimate the total deposits relating to 20172018 sales will be less than $0.1 million. Under current MSA legislation, we will not be required to make escrow deposits after making deposits for 2017 sales as our last remaining product line subject to MSA legislation, MYO cigarette smoking tobacco, was discontinued in the third quarter of 2017. Each year’s deposit will be released from escrow after 25 years. We are scheduled to begin receiving payments as our escrow deposits are released from escrow beginning in 2024.
The following table summarizes our escrow deposit balances (in thousands) by sales year as of:
| | Deposits | | | Sales Year | | December 31, 2017 | | | December 31, 2016 | | | Sales | | | Deposits as of December 31, | | Year | | | 2020 | | | 2019 | | | | | | | | | | | | | | | 1999 | | $ | 211 | | | $ | 211 | | | $ | 211 | | | $ | 211 | | 2000 | | | 1,017 | | | | 1,017 | | | | 1,017 | | | | 1,017 | | 2001 | | | 1,673 | | | | 1,673 | | | | 1,673 | | | | 1,673 | | 2002 | | | 2,271 | | | | 2,271 | | | | 2,271 | | | | 2,271 | | 2003 | | | 4,249 | | | | 4,249 | | | | 4,249 | | | | 4,249 | | 2004 | | | 3,715 | | | | 3,715 | | | | 3,714 | | | | 3,714 | | 2005 | | | 4,552 | | | | 4,552 | | | | 4,553 | | | | 4,553 | | 2006 | | | 3,847 | | | | 3,847 | | | | 3,847 | | | | 3,847 | | 2007 | | | 4,167 | | | | 4,167 | | | | 4,167 | | | | 4,167 | | 2008 | | | 3,364 | | | | 3,364 | | | | 3,364 | | | | 3,364 | | 2009 | | | 1,626 | | | | 1,626 | | | | 1,619 | | | | 1,619 | | 2010 | | | 406 | | | | 406 | | | | 406 | | | | 406 | | 2011 | | | 193 | | | | 193 | | | | 193 | | | | 193 | | 2012 | | | 199 | | | | 199 | | | | 199 | | | | 199 | | 2013 | | | 173 | | | | 173 | | | | 173 | | | | 173 | | 2014 | | | 143 | | | | 142 | | | | 143 | | | | 143 | | 2015 | | | 101 | | | | 100 | | | | 101 | | | | 101 | | 2016 | | | 80 | | | | 37 | | | | 91 | | | | 91 | | 2017 | | | 70 | | | | - | | | | 83 | | | | 83 | | | | | | | | | | | | | | | | | | | Total | | $ | 32,057 | | | $ | 31,942 | | | $ | 32,074 | | | $ | 32,074 | |
Off-balance Sheet Arrangements
During 2017, we executed no forward contracts. During 2016,2020, we executed various forward contracts for the purchase of €5.6€19.7 million and sale of €21.4 million with maturity dates ranging from January 26, 2017,December 2020 to July 17, 2017.November 2021. At December 31, 2017 and 2016,2020, we had forward contracts for the purchase of €0€18.0 million and €4.9sale of €19.6 million. The fair value of the foreign currency contracts are based on quoted market prices and resulted in an asset of $0.4 million respectively.included in Other current assets and liability of $0.0 million included in Accrued liabilities at December 31, 2020. During 2019 we did not execute any forward contracts. We had interest rate swap contracts for a total notional amount of $70 million at December 31, 2020 and December 31, 2019. The fair values of the interest rate swap contracts are based upon quoted market prices and resulted in a liability of $3.7 million and $2.5 million, respectively, as of December 31, 2020 and December 31, 2019, included in other long-term liabilities.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 20172020 (in thousands): and does not give effect to the Offering of the Senior Secured Notes or the repayment of the 2018 Credit Facility:
| | Payments due by period | | | Payments due by period | | | | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | More than 5 years | | Long-term debt obligations, including interest | | $ | 266,052 | | | $ | 29,803 | | | $ | 42,444 | | | $ | 193,805 | | | $ | - | | | $ | 346,170 | | | $ | 25,709 | | | $ | 143,637 | | | $ | 176,824 | | | $ | - | | Operating lease obligations | | | 3,462 | | | | 1,713 | | | | 1,749 | | | | - | | | | - | | | | 23,115 | | | | 4,021 | | | | 7,193 | | | | 4,473 | | | | 7,428 | | Purchase obligations | | | 37,705 | | | | 37,705 | | | | - | | | | - | | | | - | | | | 37,826 | | | | 37,826 | | | | - | | | | - | | | | - | | | | $ | 307,219 | | | $ | 69,221 | | | $ | 44,193 | | | $ | 193,805 | | | $ | - | | | $ | 407,111 | | | $ | 67,556 | | | $ | 150,830 | | | $ | 181,297 | | | $ | 7,428 | |
The total lease expense included in the consolidated statements of income for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, was $2.6$3.9 million, $1.8$4.3 million, and $1.8$3.6 million, respectively.
Inflation
We believe that any effect of inflation at current levels will be minimal. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and believe that we will continue to be able to do so for the foreseeable future. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to our successful procurement with regard to our tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Sensitivity
Our inventory purchases from BolloréRTI are denominated in euros. Accordingly, we have exposure to potentially adverse movements in the euro exchange rate. In addition, BolloréRTI provides a contractual hedge against catastrophic currency fluctuation in our agreement. We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that offsets the effects of changes in foreign exchange rates.
We regularly review our foreign currency risk and its hedging programs and may as part of that review determine at any time to change our hedging policy. During 2017,2020, we executed no forward contracts, and at December 31, 2017, we had novarious forward contracts for purchase.the purchase of €19.7 million and sale of €21.4 million with maturity dates ranging from December 2020 to November 2021. At December 31, 2020, we had forward contracts for the purchase of €18.0 million and sale of €19.6 million. A 10% change in the euro to U.S. dollars exchange rate would change pre-tax income by approximately $0.8$0.9 million per year.
Credit Risk
At December 31, 20172020 and 2016,2019, we had bank deposits, including MSA escrows, in excess of federally insured limits of approximately $5.0$69.7 million and $5.2$126.0 million, respectively. The Company has chosen to invest a portion of the MSA escrows, from time to time, in U.S. Government securities including Treasury Notes and Treasury Bonds.
We sell our products to distributors, retail establishments, and individual consumers (via online sales from the newly acquired VaporBeast and Vapor Shark) throughout the U.S. and also have sales of Zig-Zag® premium cigarette papers in Canada. In 20172020, 2019, and 2016,2018, we had no customers that accounted for more than 10% of our grossnet sales. We perform periodic credit evaluations of our customers and generally do not require collateral on trade receivables. Historically, we have not experienced significant losses due to customer credit issues.
Interest Rate Sensitivity
We have exposure to interest rate volatility principally relating to interest rate changes applicable to loans under our 2017 Revolving2018 Credit Facility and borrowings under the 2017 First Lien Term Loans.Facility. As of December 31, 2017, all of2020, our debt with the exception of the 2017 Second Lien Term Loan and VaporBeast Note Payable2018 Credit Facility bears interest at variable rates. However, the Company had swap contracts for a total notional amount of $70 million at December 31, 2020. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $3.7 million as of December 31, 2020. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations or cash flows would not be significant. A 1% change in the interest rate would change pre-tax income by approximately $1.7$0.6 million per year.
Item 8. Financial Statements and Supplementary Data
TURNING POINT BRANDS, INC.
CONTENTS
| Page | | | | 4756 | Financial Statements: | | | 4857 | | 4958 | | 5059 | | 5160 | | 5362 | | 5463 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Turning Point Brands, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Turning Point Brands, Inc. and its subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, changes in stockholders'stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company'sCompany’s auditor since 2006.
Greensboro, North Carolina March 8, 2018February 19, 2021
Turning Point Brands, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 20172020 and 20162019 (dollars in thousands except share data)
| | | December 31, 2020 | | | December 31, 2019 | | ASSETS | | December 31, 2017 | | | December 31, 2016 | | | | | | | | Current assets: | | | | | | | | | | | | | Cash | | $ | 2,607 | | | $ | 2,865 | | | $ | 41,765 | | | $ | 95,250 | | Accounts receivable, net of allowances of $17 in 2017 and $35 in 2016 | | | 3,248 | | | | 2,181 | | | Accounts receivable, net of allowances of $150 in 2020 and $280 in 2019 | | | | 9,331 | | | | 6,906 | | Inventories | | | 63,296 | | | | 62,185 | | | | 79,750 | | | | 70,979 | | Other current assets | | | 10,342 | | | | 11,625 | | | | 26,451 | | | | 16,115 | | Total current assets | | | 79,493 | | | | 78,856 | | | | 157,297 | | | | 189,250 | | Property, plant and equipment, net | | | 8,859 | | | | 7,590 | | | Deferred income taxes | | | 450 | | | | 6,288 | | | Property, plant, and equipment, net | | | | 15,524 | | | | 13,816 | | Right of use assets | | | | 17,918 | | | | 12,130 | | Deferred financing costs, net | | | 630 | | | | 139 | | | | 641 | | | | 890 | | Goodwill | | | 134,620 | | | | 134,390 | | | | 159,621 | | | | 154,282 | | Other intangible assets, net | | | 26,436 | | | | 27,138 | | | | 79,422 | | | | 33,469 | | Master Settlement Agreement - escrow deposits | | | 30,826 | | | | 30,410 | | | Pension asset | | | 396 | | | | - | | | Master Settlement Agreement (MSA) escrow deposits | | | | 32,074 | | | | 32,074 | | Other assets | | | 567 | | | | 209 | | | | 26,836 | | | | 10,673 | | Total assets | | $ | 282,277 | | | $ | 285,020 | | | $ | 489,333 | | | $ | 446,584 | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Accounts payable | | $ | 3,686 | | | $ | 9,153 | | | $ | 9,201 | | | $ | 14,126 | | Accrued liabilities | | | 18,229 | | | | 15,336 | | | | 35,225 | | | | 26,520 | | Accrued interest expense | | | 465 | | | | 394 | | | Current portion of long-term debt | | | 7,850 | | | | 1,650 | | | | 12,000 | | | | 15,240 | | Revolving credit facility | | | 8,000 | | | | 15,034 | | | Other current liabilities | | | | 203 | | | | 0 | | Total current liabilities | | | 38,230 | | | | 41,567 | | | | 56,629 | | | | 55,886 | | Notes payable and long-term debt | | | 186,190 | | | | 201,541 | | | | 277,962 | | | | 268,951 | | Postretirement benefits | | | 3,962 | | | | 4,407 | | | Pension benefits | | | - | | | | 423 | | | Deferred income taxes | | | | 4,082 | | | | 1,572 | | Lease liabilities | | | | 16,117 | | | | 11,067 | | Other long-term liabilities | | | 571 | | | | 3,024 | | | | 3,704 | | | | 2,523 | | Total liabilities | | | 228,953 | | | | 250,962 | | | | 358,494 | | | | 339,999 | | | | | | | | | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | | 0 | | | | 0 | | | | | | | | | | | | | | | | | | | Stockholders' equity: | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0- | | | - | | | | - | | | | 0 | | | | 0 | | Common stock, voting, $0.01 par value; authorized shares, 190,000,000; issued and outstanding shares, 2017 19,210,633 and 2016 18,402,022 | | | 192 | | | | 184 | | | Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0- | | | - | | | | - | | | Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 19,532,464 issued shares, 19,133,794 outstanding shares at December 31, 2020, and 19,680,673 issued and outstanding shares at December 31, 2019 | | | | 195 | | | | 197 | | Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000;issued and outstanding shares -0- | | | | 0 | | | | 0 | | Additional paid-in capital | | | 103,640 | | | | 104,895 | | | | 127,362 | | | | 125,469 | | Cost of repurchased common stock (398,670 shares at December 31, 2020 and 0 shares at December 31, 2019) | | | | (10,191 | ) | | | 0 | | Accumulated other comprehensive loss | | | (2,973 | ) | | | (4,049 | ) | | | (2,635 | ) | | | (3,773 | ) | Accumulated deficit | | | (47,535 | ) | | | (66,972 | ) | | Total stockholders' equity | | | 53,324 | | | | 34,058 | | | Total liabilities and stockholders' equity | | $ | 282,277 | | | $ | 285,020 | | | Accumulated earnings (deficit) | | | | 12,058 | | | | (15,308 | ) | Non-controlling interest | | | | 4,050 | | | | 0 | | Total stockholders’ equity | | | | 130,839 | | | | 106,585 | | Total liabilities and stockholders’ equity | | | $ | 489,333 | | | $ | 446,584 | |
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Income for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 (dollars in thousands except share data)
| | | For the year ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2020 | | | 2019 | | | 2018 | | Net sales | | $ | 285,777 | | | $ | 206,228 | | | $ | 197,256 | | | $ | 405,111 | | | $ | 361,989 | | | $ | 332,683 | | Cost of sales | | | 160,908 | | | | 105,872 | | | | 100,960 | | | | 215,475 | | | | 225,243 | | | | 190,124 | | Gross profit | | | 124,869 | | | | 100,356 | | | | 96,296 | | | | 189,636 | | | | 136,746 | | | | 142,559 | | Selling, general and administrative expenses | | | 75,369 | | | | 56,771 | | | | 51,785 | | | Selling, general, and administrative expenses | | | | 125,563 | | | | 109,887 | | | | 94,075 | | Operating income | | | 49,500 | | | | 43,585 | | | | 44,511 | | | | 64,073 | | | | 26,859 | | | | 48,484 | | Interest expense | | | 16,889 | | | | 26,621 | | | | 34,284 | | | Gain on investment | | | (438 | ) | | | (768 | ) | | | - | | | Interest expense, net | | | | 20,226 | | | | 17,342 | | | | 14,819 | | Investment income | | | | (198 | ) | | | (2,648 | ) | | | (424 | ) | Loss on extinguishment of debt | | | 6,116 | | | | 2,824 | | | | - | | | | 0 | | | | 1,308 | | | | 2,384 | | Net periodic benefit cost (income), excluding service cost | | | | 989 | | | | (4,961 | ) | | | 131 | | Income before income taxes | | | 26,933 | | | | 14,908 | | | | 10,227 | | | | 43,056 | | | | 15,818 | | | | 31,574 | | Income tax expense (benefit) | | | 7,280 | | | | (12,005 | ) | | | 1,078 | | | Income tax expense | | | | 10,015 | | | | 2,044 | | | | 6,285 | | Consolidated net income | | | 19,653 | | | | 26,913 | | | | 9,149 | | | $ | 33,041 | | | $ | 13,774 | | | $ | 25,289 | | Net loss attributable to non-controlling interest | | $ | (556 | ) | | $ | - | | | $ | - | | | Net income attributable to Turning Point Brands, Inc. | | $ | 20,209 | | | $ | 26,913 | | | $ | 9,149 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic income per common share: | | | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Turning Point Brands, Inc. | | $ | 1.06 | | | $ | 1.63 | | | $ | 1.27 | | | Consolidated net income | | | $ | 1.70 | | | $ | 0.70 | | | $ | 1.31 | | Diluted income per common share: | | | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Turning Point Brands, Inc. | | $ | 1.04 | | | $ | 1.49 | | | $ | 1.10 | | | Consolidated net income | | | $ | 1.67 | | | $ | 0.69 | | | $ | 1.28 | | Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 18,989,177 | | | | 16,470,352 | | | | 7,198,081 | | | | 19,398,474 | | | | 19,627,093 | | | | 19,355,607 | | Diluted | | | 19,513,008 | | | | 18,015,545 | | | | 8,354,387 | | | | 19,734,633 | | | | 20,037,540 | | | | 19,827,562 | |
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 (dollars in thousands)
| | 2017 | | | 2016 | | | 2015 | | Net income attributable to Turning Point Brands, Inc. | | $ | 20,209 | | | $ | 26,913 | | | $ | 9,149 | | | | | | | | | | | | | | | Other comprehensive income (loss), net of tax - | | | | | | | | | | | | | Pension and postretirement | | | | | | | | | | | | | Amortization of unrealized (gains) losses recorded in cost of sales | | | (29 | ) | | | - | | | | 23 | | Amortization of unrealized losses recorded in selling, general and administrative expenses | | | 442 | | | | 469 | | | | 502 | | Actuarial gain (loss) | | | 1,019 | | | | (56 | ) | | | 51 | | Tax effect | | | (543 | ) | | | - | | | | - | | Unrealized gain (loss) on investments, net of tax of $114, 2017, and $582, 2016 | | | 187 | | | | (950 | ) | | | - | | | | | 1,076 | | | | (537 | ) | | | 576 | | Comprehensive income | | $ | 21,285 | | | $ | 26,376 | | | $ | 9,725 | |
| | For the year ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Consolidated net income | | $ | 33,041 | | | $ | 13,774 | | | $ | 25,289 | | | | | | | | | | | | | | | Other comprehensive income (loss), net of tax | | | | | | | | | | | | | Amortization of unrealized pension and postretirement gain (loss), net of tax of $57 in 2020, $136 in 2019, and $435 in 2018 | | | 1,830 | | | | (1,150 | ) | | | 1,361 | | Unrealized gain (loss) on investments, net of tax of $0 in 2020, $351 in 2019, and $31 in 2018 | | | 0 | | | | 1,174 | | | | (266 | ) | Unrealized loss on deriviative instruments, net of tax of $233 in 2020, $377 in 2019 and $204 in 2018 | | | (692 | ) | | | (1,261 | ) | | | (682 | ) | | | | 1,138 | | | | (1,237 | ) | | | 413 | | | | | | | | | | | | | | | Comprehensive income | | $ | 34,179 | | | $ | 12,537 | | | $ | 25,702 | |
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 (dollars in thousands)
| | | For the year ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2020 | | | 2019 | | | 2018 | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | Consolidated net income | | $ | 19,653 | | | $ | 26,913 | | | $ | 9,149 | | | $ | 33,041 | | | $ | 13,774 | | | $ | 25,289 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | Loss on extinguishment of debt | | | 6,116 | | | | 2,824 | | | | - | | | | 0 | | | | 1,308 | | | | 2,384 | | (Gain) loss on sale of property, plant and equipment | | | 150 | | | | - | | | | (2 | ) | | Pension settlement and curtailment loss | | | | 1,188 | | | | 0 | | | | 0 | | Loss on sale of property, plant, and equipment | | | | 123 | | | | 7 | | | | 0 | | Impairment loss | | | | 149 | | | | 301 | | | | 0 | | Gain on postretirement plan termination | | | | 0 | | | | (4,915 | ) | | | 0 | | Gain on investments | | | | 0 | | | | (2,000 | ) | | | 0 | | Depreciation expense | | | 1,626 | | | | 1,227 | | | | 1,059 | | | | 3,237 | | | | 2,638 | | | | 2,105 | | Amortization of deferred financing costs | | | 1,005 | | | | 1,419 | | | | 1,448 | | | Amortization of original issue discount | | | 66 | | | | 724 | | | | 1,048 | | | Amortization of other intangible assets | | | 702 | | | | 58 | | | | - | | | | 1,781 | | | | 1,451 | | | | 1,005 | | Interest incurred but not paid on PIK Toggle Notes | | | - | | | | 3,422 | | | | 8,229 | | | Interest incurred but not paid on 7% Senior Notes | | | - | | | | 329 | | | | 851 | | | Interest paid on PIK Toggle Notes | | | - | | | | (9,893 | ) | | | - | | | Reserve of note receivable | | | - | | | | 430 | | | | - | | | Amortization of debt discount and deferred financing costs | | | | 8,969 | | | | 4,365 | | | | 951 | | Deferred income taxes | | | 5,181 | | | | (12,719 | ) | | | 51 | | | | 2,800 | | | | (4,219 | ) | | | 2,565 | | Stock compensation expense | | | 720 | | | | 180 | | | | 234 | | | | 2,554 | | | | 3,629 | | | | 1,411 | | Noncash lease expense | | | | 370 | | | | 357 | | | | 0 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | | (1,067 | ) | | | 2,072 | | | | (1,407 | ) | | | (2,112 | ) | | | (3,464 | ) | | | 824 | | Inventories | | | 495 | | | | (12,513 | ) | | | 2,032 | | | | (7,650 | ) | | | 21,036 | | | | (20,650 | ) | Other current assets | | | 1,495 | | | | 1,361 | | | | 49 | | | | (5,373 | ) | | | (1,196 | ) | | | (5,097 | ) | Pension asset | | | (396 | ) | | | - | | | | - | | | Other assets | | | 62 | | | | (100 | ) | | | (118 | ) | | | 2,076 | | | | (2,864 | ) | | | 75 | | Accounts payable | | | (5,702 | ) | | | 3,631 | | | | 1,784 | | | | (5,064 | ) | | | 6,608 | | | | 2,523 | | Accrued pension liabilities | | | 588 | | | | 262 | | | | 163 | | | Accrued postretirement liabilities | | | (24 | ) | | | (172 | ) | | | (179 | ) | | | (54 | ) | | | (168 | ) | | | (97 | ) | Accrued liabilities and other | | | (980 | ) | | | (327 | ) | | | 39 | | | | 7,643 | | | | 1,147 | | | | (198 | ) | Net cash provided by operating activities | | | 29,690 | | | | 9,128 | | | | 24,430 | | | $ | 43,678 | | | $ | 37,795 | | | $ | 13,090 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditures | | | (2,021 | ) | | | (3,207 | ) | | | (1,602 | ) | | $ | (6,135 | ) | | $ | (4,815 | ) | | $ | (2,267 | ) | Acquisitions | | | 268 | | | | (23,625 | ) | | | - | | | Restricted cash, MSA escrow deposits | | | | 0 | | | | 29,718 | | | | (1,241 | ) | Acquisitions, net of cash acquired | | | | (39,441 | ) | | | (7,704 | ) | | | (19,161 | ) | Proceeds on sale of property, plant and equipment | | | | 3 | | | | 123 | | | | 0 | | Payments for investments | | | (179 | ) | | | - | | | | - | | | | (19,250 | ) | | | (1,421 | ) | | | (2,000 | ) | Proceeds from sale of property, plant and equipment | | | - | | | | - | | | | 2 | | | Issuance of note receivable | | | - | | | | - | | | | (430 | ) | | | 0 | | | | 0 | | | | (6,500 | ) | Net cash used in investing activities | | | (1,932 | ) | | | (26,832 | ) | | | (2,030 | ) | | Repayment of note receivable | | | | 0 | | | | 0 | | | | 6,500 | | Net cash provided by (used in) investing activities | | | $ | (64,823 | ) | | $ | 15,901 | | | $ | (24,669 | ) |
Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows (cont.) for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 (dollars in thousands)
| | 2017 | | | 2016 | | | 2015 | | Cash flows from financing activities: | | | | | | | | | | Proceeds from 2017 revolving credit facility | | | 8,000 | | | | - | | | | - | | Proceeds from 2017 first lien term loans | | | 145,000 | | | | - | | | | - | | Proceeds from 2017 second lien term loan | | | 55,000 | | | | - | | | | - | | Payments of 2017 first lien term loans | | | (4,387 | ) | | | - | | | | - | | Payments of financing costs | | | (4,783 | ) | | | (450 | ) | | | - | | Proceeds from (payments of) old revolving credit facility, net | | | (15,083 | ) | | | 15,016 | | | | (7,335 | ) | Payments of first lien term loan | | | (147,362 | ) | | | (4,388 | ) | | | (16,649 | ) | Payments of second lien term loan | | | (60,000 | ) | | | (20,000 | ) | | | - | | Prepaid equity issuance costs | | | (453 | ) | | | - | | | | (2,049 | ) | Payment of PIK Toggle Notes | | | - | | | | (24,107 | ) | | | - | | Redemption of Intrepid options | | | - | | | | (661 | ) | | | - | | Redemption of Intrepid warrants | | | - | | | | (5,500 | ) | | | - | | Exercise of warrants | | | - | | | | 4 | | | | - | | Exercise of options | | | 1,431 | | | | 169 | | | | 1 | | Redemption of options | | | (1,740 | ) | | | (85 | ) | | | - | | Surrender of options | | | (1,000 | ) | | | - | | | | - | | Proceeds from issuance of stock | | | - | | | | 55,736 | | | | - | | Distribution to non-controlling interest | | | (4 | ) | | | - | | | | - | | Payment of Vapor Shark loans | | | (1,867 | ) | | | - | | | | - | | Payment of cash dividends | | | (768 | ) | | | - | | | | - | | Net cash provided by (used in) financing activities | | | (28,016 | ) | | | 15,734 | | | | (26,032 | ) | | | | | | | | | | | | | | Net decrease in cash | | | (258 | ) | | | (1,970 | ) | | | (3,632 | ) | Cash, beginning of period | | | 2,865 | | | | 4,835 | | | | 8,467 | | Cash, end of period | | $ | 2,607 | | | $ | 2,865 | | | $ | 4,835 | | | | | | | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | Cash paid during the period for interest | | $ | 15,828 | | | $ | 34,553 | | | $ | 23,157 | | Cash paid during the period for income taxes, net | | $ | 1,811 | | | $ | 623 | | | $ | 1,027 | | | | | | | | | | | | | | | Supplemental schedule of noncash financing activities: | | | | | | | | | | | | | Issuance of restricted stock | | $ | - | | | $ | 279 | | | $ | - | | Conversion of PIK Toggle Notes to equity | | $ | - | | | $ | 29,014 | | | $ | - | | Conversion of 7% Senior Notes to equity | | $ | - | | | $ | 10,074 | | | $ | - | | Accrued expenses incurred for prepaid equity issuance costs | | $ | - | | | $ | - | | | $ | 1,129 | |
| | For the year ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Cash flows from financing activities: | | | | | | | | | | Proceeds from 2018 first lien term loan | | $ | 0 | | | $ | 0 | | | $ | 160,000 | | Payments of 2018 first lien term loan | | | (16,000 | ) | | | (8,000 | ) | | | (6,000 | ) | Proceeds from 2018 second lien term loan | | | 0 | | | | 0 | | | | 40,000 | | Payments of 2018 second lien term loan | | | 0 | | | | (40,000 | ) | | | 0 | | Proceeds from 2018 revolving credit facility | | | 0 | | | | 0 | | | | 26,000 | | Payments of 2018 revolving credit facility | | | 0 | | | | (26,000 | ) | | | 0 | | Proceeds from Convertible Senior Notes | | | 0 | | | | 172,500 | | | | 0 | | Payment of IVG note | | | (4,240 | ) | | | 0 | | | | 0 | | Proceeds from unsecured note | | | 7,485 | | | | 0 | | | | 0 | | Standard Diversified Inc. reorganization, net of cash acquired | | | (1,737 | ) | | | 0 | | | | 0 | | Payments for call options | | | 0 | | | | (20,528 | ) | | | 0 | | Payment of dividends | | | (3,802 | ) | | | (3,531 | ) | | | (2,318 | ) | Payments of 2017 first lien term loan | | | 0 | | | | 0 | | | | (140,613 | ) | Payments of 2017 second lien term loan | | | 0 | | | | 0 | | | | (55,000 | ) | Proceeds from (payments of) 2017 revolving credit facility, net | | | 0 | | | | 0 | | | | (8,000 | ) | Payments of VaporBeast Note Payable | | | 0 | | | | 0 | | | | (2,000 | ) | Proceeds from release of restricted funds | | | 0 | | | | 0 | | | | 1,107 | | Payments of financing costs | | | (194 | ) | | | (7,117 | ) | | | (3,286 | ) | Exercise of options | | | 862 | | | | 738 | | | | 833 | | Redemption of options | | | (1,523 | ) | | | (12 | ) | | | (623 | ) | Surrender of restricted stock | | | 0 | | | | (84 | ) | | | 0 | | Payment to terminate acquired capital lease | | | 0 | | | | 0 | | | | (170 | ) | Common stock repurchased | | | (10,191 | ) | | | 0 | | | | 0 | | Net cash provided by (used in) financing activities | | $ | (29,340 | ) | | $ | 67,966 | | | $ | 9,930 | | | | | | | | | | | | | | | Net increase (decrease) in cash | | $ | (50,485 | ) | | $ | 121,662 | | | $ | (1,649 | ) | | | | | | | | | | | | | | Cash, beginning of period: | | | | | | | | | | | | | Unrestricted | | | 95,250 | | | | 3,306 | | | | 2,607 | | Restricted | | | 32,074 | | | | 2,356 | | | | 4,704 | | Total cash at beginning of period | | | 127,324 | | | | 5,662 | | | | 7,311 | | | | | | | | | | | | | | | Cash, end of period: | | | | | | | | | | | | | Unrestricted | | | 41,765 | | | | 95,250 | | | | 3,306 | | Restricted | | | 35,074 | | | | 32,074 | | | | 2,356 | | Total cash at end of period | | $ | 76,839 | | | $ | 127,324 | | | $ | 5,662 | | | | | | | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | Cash paid during the period for interest | | $ | 11,455 | | | $ | 11,828 | | | $ | 14,238 | | Cash paid during the period for income taxes, net | | $ | 3,384 | | | $ | 11,332 | | | $ | 3,215 | | | | | | | | | | | | | | | Supplemental schedule of noncash investing activities: | | | | | | | | | | | | | Investment in General Wireless | | $ | 0 | | | $ | 0 | | | $ | 421 | | | | | | | | | | | | | | | Supplemental schedule of noncash financing activities: | | | | | | | | | | | | | Issuance of shares for acquisition | | $ | 0 | | | $ | 0 | | | $ | 5,292 | | Issuance of note payable for acquisition | | $ | 10,000 | | | $ | 0 | | | $ | 4,000 | | Dividends declared not paid | | $ | 1,099 | | | $ | 962 | | | $ | 915 | |
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 (dollars in thousands)
| | Non- Controlling Interest | | | Common Stock, Voting | | | Common Stock, Non-Voting | | | Additional Paid-In Capital | | | Accumulated Other Comprehensive Loss | | | Accumulated Deficit | | | Total | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance January 1, 2015 | | $ | - | | | $ | 72 | | | $ | - | | | $ | 12,393 | | | $ | (4,088 | ) | | $ | (99,949 | ) | | | (91,572 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common stock voting converted to non-voting | | $ | - | | | | (9 | ) | | | 9 | | | | - | | | | - | | | | - | | | | - | | Unrecognized pension and postretirement cost adjustment | | $ | - | | | | - | | | | - | | | | - | | | | 576 | | | | - | | | | 576 | | Stock compensation expense | | $ | - | | | | - | | | | - | | | | 234 | | | | - | | | | - | | | | 234 | | Exercise of options | | $ | - | | | | - | | | | - | | | | 1 | | | | - | | | | - | | | | 1 | | Net income | | $ | - | | | | - | | | | - | | | | - | | | | - | | | | 9,149 | | | | 9,149 | | Ending balance December 31, 2015 | | | - | | | | 63 | | | | 9 | | | | 12,628 | | | | (3,512 | ) | | | (90,800 | ) | | | (81,612 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common stock non-voting converted to voting | | $ | - | | | | 9 | | | | (9 | ) | | | - | | | | - | | | | - | | | | - | | Unrecognized pension and postretirement cost adjustment | | $ | - | | | | - | | | | - | | | | - | | | | 413 | | | | - | | | | 413 | | Unrealized loss on investments, net of tax of $582 | | $ | - | | | | - | | | | - | | | | - | | | | (950 | ) | | | - | | | | (950 | ) | Stock compensation expense | | $ | - | | | | - | | | | - | | | | 180 | | | | - | | | | - | | | | 180 | | Warrants exercised | | $ | - | | | | 4 | | | | - | | | | - | | | | - | | | | - | | | | 4 | | Stock issued in IPO | | $ | - | | | | 62 | | | | - | | | | 53,573 | | | | - | | | | - | | | | 53,635 | | Stock issued in exchange for debt | | $ | - | | | | 45 | | | | - | | | | 41,248 | | | | - | | | | - | | | | 41,293 | | Restricted stock grant, netted with (forfeitures) | | $ | - | | | | - | | | | - | | | | 259 | | | | - | | | | - | | | | 259 | | Exercise of options | | $ | - | | | | 1 | | | | - | | | | 168 | | | | - | | | | - | | | | 169 | | Redemption of options | | $ | - | | | | - | | | | - | | | | (85 | ) | | | - | | | | - | | | | (85 | ) | Redemption of Intrepid options | | $ | - | | | | - | | | | - | | | | (326 | ) | | | - | | | | (335 | ) | | | (661 | ) | Redemption of Intrepid warrants | | $ | - | | | | - | | | | - | | | | (2,750 | ) | | | - | | | | (2,750 | ) | | | (5,500 | ) | Net income | | $ | - | | | | - | | | | - | | | | - | | | | - | | | | 26,913 | | | | 26,913 | | Ending balance December 31, 2016 | | $ | - | | | $ | 184 | | | $ | - | | | $ | 104,895 | | | $ | (4,049 | ) | | $ | (66,972 | ) | | $ | 34,058 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrecognized pension and postretirement cost adjustment | | $ | - | | | | - | | | | - | | | | - | | | | 889 | | | | - | | | | 889 | | Unrealized gain on MSA investments, net of tax of $113 | | $ | - | | | | - | | | | - | | | | - | | | | 185 | | | | - | | | | 185 | | Unrealized gain on other investments, net of tax of $1 | | $ | - | | | | - | | | | - | | | | - | | | | 2 | | | | - | | | | 2 | | Stock compensation expense | | $ | - | | | | - | | | | - | | | | 648 | | | | - | | | | - | | | | 648 | | Restricted stock forfeitures | | $ | - | | | | - | | | | - | | | | (63 | ) | | | - | | | | - | | | | (63 | ) | Acquisition of non-controlling interest | | $ | 560 | | | | - | | | | - | | | | (560 | ) | | | - | | | | - | | | | - | | Distribution to non-controlling interest | | $ | (4 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4 | ) | Exercise of options | | $ | - | | | | 9 | | | | - | | | | 1,422 | | | | - | | | | - | | | | 1,431 | | Surrender of options | | $ | - | | | | - | | | | - | | | | (1,000 | ) | | | - | | | | - | | | | (1,000 | ) | Redemption of options | | $ | - | | | | (1 | ) | | | - | | | | (1,702 | ) | | | - | | | | - | | | | (1,703 | ) | Dividends | | $ | - | | | | - | | | | - | | | | - | | | | - | | | | (772 | ) | | | (772 | ) | Net income (loss) | | $ | (556 | ) | | | - | | | | - | | | | - | | | | - | | | | 20,209 | | | | 19,653 | | Ending balance December 31, 2017 | | $ | - | | | $ | 192 | | | $ | - | | | $ | 103,640 | | | $ | (2,973 | ) | | $ | (47,535 | ) | | $ | 53,324 | |
| | Voting Shares | | | Common Stock, Voting | | | Additional Paid-In Capital | | | Cost of Repurchased Common Stock | | | Accumulated Other Comprehensive Loss | | | Accumulated Earnings (Deficit) | | | Non- Controlling Interest | | | Total | | Beginning balance January 1, 2018 | | | 19,210,633 | | | $ | 192 | | | $ | 103,640 | | | $ | 0 | | | $ | (2,973 | ) | | $ | (47,535 | ) | | $ | 0 | | | $ | 53,324 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrecognized pension and postretirement cost adjustment, net of tax of $435 | | | - | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,361 | | | $ | 0 | | | $ | 0 | | | $ | 1,361 | | Unrealized loss on MSA investments, net of tax of $31 | | | - | | | | 0 | | | | 0 | | | | 0 | | | | (263 | ) | | | 0 | | | | 0 | | | | (263 | ) | Unrealized loss on other investments, net of tax of $1 | | | - | | | | 0 | | | | 0 | | | | 0 | | | | (3 | ) | | | 0 | | | | 0 | | | | (3 | ) | Unrealized loss on derivative instruments, net of tax of $204 | | | - | | | | 0 | | | | 0 | | | | 0 | | | | (682 | ) | | | 0 | | | | 0 | | | | (682 | ) | Stock compensation expense | | | - | | | | 0 | | | | 1,336 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,336 | | Restricted stock forfeitures | | | (3,128 | ) | | | 0 | | | | (8 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (8 | ) | Exercise of options | | | 193,273 | | | | 2 | | | | 831 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 833 | | Redemption of options | | | - | | | | 0 | | | | (623 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (623 | ) | Dividends | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (3,233 | ) | | | 0 | | | | (3,233 | ) | Reclassification of tax effects from accumulated other comprehensive income | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 24 | | | | (24 | ) | | | 0 | | | | 0 | | IVG issuance of stock | | | 153,079 | | | | 2 | | | | 5,290 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 5,292 | | Net income | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 25,289 | | | | 0 | | | | 25,289 | | Ending balance December 31, 2018 | | | 19,553,857 | | | $ | 196 | | | $ | 110,466 | | | $ | 0 | | | $ | (2,536 | ) | | $ | (25,503 | ) | | $ | 0 | | | $ | 82,623 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrecognized pension and postretirement cost adjustment, net of tax of $136 | | | - | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (1,150 | ) | | $ | 0 | | | $ | 0 | | | $ | (1,150 | ) | Unrealized loss on MSA investments, net of tax of $351 | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 1,174 | | | | 0 | | | | 0 | | | | 1,174 | | Unrealized loss on derivative instruments, net of tax of $377 | | | - | | | | 0 | | | | 0 | | | | 0 | | | | (1,261 | ) | | | 0 | | | | 0 | | | | (1,261 | ) | Stock compensation expense | | | - | | | | 0 | | | | 3,600 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 3,600 | | Restricted stock forfeitures | | | (1,947 | ) | | | 0 | | | | (84 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (84 | ) | Exercise of options | | | 128,763 | | | | 1 | | | | 738 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 739 | | Redemption of options | | | - | | | | 0 | | | | (12 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (12 | ) | Dividends | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (3,579 | ) | | | 0 | | | | (3,579 | ) | Purchase of call options, net of tax of $5,195 | | | - | | | | 0 | | | | (15,332 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (15,332 | ) | Issuance of Convertible Senior Notes, net of tax of $8,857 | | | - | | | | 0 | | | | 24,938 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 24,938 | | Fair value of earn-out | | | - | | | | 0 | | | | 1,155 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,155 | | Net income | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 13,774 | | | | 0 | | | | 13,774 | | Ending balance December 31, 2019 | | | 19,680,673 | | | $ | 197 | | | $ | 125,469 | | | $ | 0 | | | $ | (3,773 | ) | | $ | (15,308 | ) | | $ | 0 | | | $ | 106,585 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrecognized pension and postretirement cost adjustment, net of tax of $57 | | | - | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,830 | | | $ | 0 | | | $ | 0 | | | $ | 1,830 | | Unrealized loss on derivative instruments, net of tax of $233 | | | - | | | | 0 | | | | 0 | | | | 0 | | | | (692 | ) | | | 0 | | | | 0 | | | | (692 | ) | Stock compensation expense | | | - | | | | 0 | | | | 2,554 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 2,554 | | Exercise of options | | | 96,005 | | | | 0 | | | | 862 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 862 | | Redemption of options | | | - | | | | 0 | | | | (1,523 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (1,523 | ) | Cost of repurchased common stock | | | (398,670 | ) | | | 0 | | | | 0 | | | | (10,191 | ) | | | 0 | | | | 0 | | | | 0 | | | | (10,191 | ) | Standard Diversified Inc. reorganization, net | | | (244,214 | ) | | | (2 | ) | | | 0 | | | | 0 | | | | 0 | | | | (1,735 | ) | | | 0 | | | | (1,737 | ) | Dividends | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (3,940 | ) | | | 0 | | | | (3,940 | ) | ReCreation acquisition | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4,050 | | | | 4,050 | | Net income | | | - | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 33,041 | | | | 0 | | | | 33,041 | | Ending balance December 31, 2020 | | | 19,133,794 | | | $ | 195 | | | $ | 127,362 | | | $ | (10,191 | ) | | $ | (2,635 | ) | | $ | 12,058 | | | $ | 4,050 | | | $ | 130,839 | |
The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc. and Subsidiaries Notes to Consolidated Financial Statements (dollars in thousands, except where designated and per share data)
Note 1. Organizations and Basis of Presentation:Presentation
OrganizationsDescription of Business
Turning Point Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag® and Stoker’s® to our next generation products to fulfill evolving consumer preferences. Our 3 focus segments are led by our core, proprietary brands: Zig-Zag® in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; and Nu-XTM, Solace® along with our distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) in the NewGen Products segment. The Company’s products are available in more than 210,000 retail outlets in North America. In order to better align with Turning Point Brands, Inc. (the “Company), is’s positioning as a holdingbranded consumer products company which owns North Atlantic Trading Company, Inc. (“NATC”), and to highlight the strength of its subsidiaries and Turning Point Brands, LLC (“TPLLC”), and its subsidiaries. Except where the context indicates otherwise, references tofocus brands, the Company includehas renamed its 2 core business segments from Smoking Products to Zig-Zag Products and Smokeless Products to Stoker’s Products. Historical financial results are not impacted by the Company; NATCsegment name change. We operate in 3 segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and its subsidiaries National Tobacco Company, L.P. (“NTC”), National Tobacco Finance, LLC (“NTFLLC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), and RBJ Sales, Inc. (“RBJ”); and TPLLC and its subsidiaries Intrepid Brands, LLC (“Intrepid”), VaporBeast, LLC (“VaporBeast,” f/k/a Smoke Free Technologies, Inc.), and Vapor Shark, LLC, and its subsidiaries (collectively, “Vapor Shark,” f/k/a The Hand Media)(iii) NewGen Products. Effective December 31, 2017, the Company (1) merged Smoke Free Technologies, Inc., into VaporBeast, LLC, (2) transferred direct ownership
Basis of VaporBeast from NATC to TPLLC, and (3) converted National Tobacco Finance Corporation to an LLC—NTFLLC.Presentation
The Company is the second largest marketer of loose leaf chewing tobaccoaccompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States selling its products under the Beech-Nut®, Trophy®, Havana Blossom®, Durango®, Stoker’s®, Our Pride®, Big Mountain®, Appalachia™, Springfield Standard®, and Snake River® brands. NTC manufactures and markets Stoker’s® moist snuff. NTC packages and markets for NAOC, on a contract basis, Zig-Zag® cigar blend smoking tobacco; markets Zig-Zag® make-your-own (“MYO”GAAP”) cigar wraps and cigars; and processes, packages, and markets Red Cap™ pipe tobacco. NAOC is a leading importer in the United States of premium cigarette papers and related products, which are sold under the Zig-Zag® brand name pursuant to an exclusive long-term distribution agreement with Bolloré, S.A. Intrepid markets products that do not contain tobacco leaf, including herbal products under the Primal brand, electronic cigarettes (“e-cigarettes”), vaporizers, liquid vapor products, and tobacco vaporizers under the Zig-Zag® and V2 brands. VaporBeast and Vapor Shark are primarily e-commerce companies that focus on the sales, distribution, and development of alternatives to combustible cigarettes such as e-cigarettes, e-liquids, and accessories. Vapor Shark also owns and operates seven retail stores throughout southern Florida.
Basis of Presentation
The consolidated financial statements include the Company, as well as its wholly-owned subsidiaries. All intercompany transactions have been eliminated.
. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates include those affecting the valuation of goodwill and other intangible assets, assumptions used in determining pension and postretirement benefit obligations, and deferred income tax valuation allowances.allowances and the valuation of inventory, including reserves.
Certain prior years’year amounts have been reclassified to conform to the current year’s presentation. The changes did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows in any of the periods presented.
Note 2. Summary of Significant Accounting Policies:Policies
Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned,wholly owned, and variable interest entities (“VIEs”) for which the results of Vapor Shark from April 1, 2017, through June 30, 2017.Company is considered the primary beneficiary. All significant intercompany transactions have been eliminated. From April 1 GAAP requires the Company to identify entities for which control is achieved through June 30, 2017, Vapor Shark wasmeans other than voting rights and to determine whether the Company is the primary beneficiary of VIEs. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a variablegroup, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; and (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company consolidates its investment in a VIE when it determines that it is the VIE’s primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The primary beneficiary of a VIE as the entity that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. The Company performs this analysis on an ongoing basis. Effective November 2020, management of the Company has determined that ReCreation Marketing (“VIE”ReCreation”) is a VIE for which the Company wasis considered the primary beneficiary due to an April 2017 management agreement in whichthe power the Company was grantedhas over the activities that most significantly impact the economic performance of ReCreation and the right to purchase 100%receive benefits and the obligation to absorb losses of ReCreation through the Company’s 50% equity interest, additional subordinated financing provided by the Company to ReCreation and the distribution agreement with ReCreation for the sale of the equity interest of Vapor Shark. The Company did not own Vapor Shark during the second quarter of 2017; however, Vapor Shark’s financial results are included in the Company’s consolidated results as a VIE. On June 30, 2017, the Company exercised a warrant to purchaseproducts that makes up substantially all of the issued and outstanding equity of Vapor Shark. Beginning June 30, 2017, Vapor Shark became a wholly owned subsidiary of the Company.ReCreations’s business activities. See ‘Note 4 – Acquisitions’Note 3, “Acquisitions” for further details regarding the warrant exercise.consolidation of ReCreation.
Revenue Recognition
The Company recognizes revenues net of sales incentivesin accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and sales returns, including shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer, customer—at which time therethe Company’s performance obligation is a transfer of title and risk of losssatisfied—at an amount that the Company expects to the customerbe entitled to in exchange for those goods in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification© (“ASC”) 605-10-S99.five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company classifies customer rebatesexcludes from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars, or vaping products billed to customers).
The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales deductionsincentives are included in accordanceaccrued liabilities on the consolidated balance sheets.
A further requirement of ASU 2014-09 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the requirementsnature, amount, timing, and uncertainty of ASC 605-50-25.revenue and cash flows are affected by economic factors. Company management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 21, “Segment Information”. An additional disaggregation of contract revenue by sales channel can be found within Note 21 as well.
Derivative Instruments
Foreign Currency Forward Contracts:The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, as amended, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to ninety percent90percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive income into net incomeinventory as the related inventories are received.received and are transferred to net income as inventory is sold. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.
Interest Rate Swap Agreements: The Company enters into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. The Company accounts for its interest rate swap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income currently.as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensive income into net income upon settlement of the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.
Shipping Costs
The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $10.4$22.8 million, $6.5$18.1 million, and $6.4$15.1 million in 2017, 2016,2020, 2019, and 2015,2018, respectively.
Research and Development and Quality Assurance Costs
Research and development and quality assurance costs are expensed as incurred. These expenses, classified as selling, general and administrative expenses, were approximately $1.9$1.3 million, $1.8$2.5 million, and $1.4$2.5 million in 2017, 2016,2020, 2019, and 2015,2018, respectively.
Cash and Cash Equivalents
The Company considers any highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for approximately 51%45.1% of the inventories.inventories and first-in, first-out (“FIFO”) for the remaining inventories as of December 31, 2020. Inventories that are measured using the LIFO method are stated at the lower of cost or market. Inventories that are measured using the FIFO method are stated at the lower of cost or net realizable value. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.
Property, Plant and Equipment
Property, Plant and Equipment are stated at cost less accumulated depreciation and impairment. Depreciation is provided using the straight-line method over the lesser of the estimated useful lives of the assets or the life of the leases for leasehold improvements (4 to 7 years for machinery, equipment and furniture, 10 to 15 years for leasehold improvements, and up to 15 years for buildings and building improvements). Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and improvements are capitalized and depreciated over their estimated useful lives. Upon disposition of fixed assets, the costs and related accumulated depreciation amounts are relieved. Any resulting gain or loss is reflected in operations during the period of disposition. Long-lived assets are reviewed for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Goodwill and Other Intangible Assets
The Company follows the provisions of ASC 350, Intangibles – Goodwill and Other. In accordance with ASC 350-20-35,Other in accounting for goodwill and other intangible assets. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually on December 31, or more frequently if certain indicators are present.present, in accordance with ASC 350-20-35 and ASC 350-30-35, respectively. If the carrying value of a reporting unit including goodwill exceeds its fair value, which is determined using the discounted cash flows, goodwill oris considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the fair value of the reporting unit but is limited to the total goodwill allocated to the reporting unit. If the carrying value of an indefinite-life intangible asset exceeds its fair value, which is determined using discounteddiscontinued cash flows or relief-from-royalty, the goodwill or intangible asset is considered impaired. The carrying value of the goodwill or indefinite-life intangible asset would then beimpaired and is reduced to fair value. For goodwill, the determination of a reporting unit’s fair value involves, among other things, the Company’s market capitalization and application of the income approach, which includes developing forecasts of future cash flows and determining an appropriate discount rate. Based on itsthe Company’s annual goodwill impairment testing, the estimated fair values of each of the Company’sour reporting units were substantially in excess of the respective carrying values.values at December 31, 2020. The Company had no0 such impairment of goodwill or other intangible assets during the year ended December 31, 2017.2020. However, there could be an impairment of the goodwill of the NewGen reporting unit if future revenues do not achieve our expected future cash flows or if macroeconomic conditions result in future increases in the weighted average cost of capital used to estimate fair value. See Note 10, “Goodwill and Other Intangible Assets”, for further details regarding the Company’s goodwill and other intangible assets as of December 31, 2020.
Fair Value
GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).
The three levels of the fair value hierarchy under GAAP are described below:
| · | Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date. |
| · | Level 2 – Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| · | Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. | Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
Retirement Plans
The Company follows the provisions of ASC 715, Compensation – Retirement Benefits. ASC 715-30, Defined Benefit Plans – Pensions, which requires an employer to (a) recognize in its statement of financial position the funded status of a benefit plan, measured as the difference between the fair value of plan assets and benefit obligations, (b) recognize net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, and (c) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position.
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related debt obligations using the effective interest method. Unamortized amounts are expensed upon extinguishment of the related borrowings. Deferred financing costs are presented as a direct deduction from the carrying amount of that debt liability except for deferred financing costs relating to our revolving credit facility, which are presented as an asset.
Income Taxes
The Company records the effects of income taxes under the liability method in which deferred income tax assets and liabilities are recognized based on the difference between the financial and tax basis of assets and liabilities using the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company assesses its ability to realize future benefits of deferred tax assets by determining if they meet the “more likely than not” criteria in ASC 740, Income Taxes. If the Company determines that future benefits do not meet the “more likely than not” criteria, a valuation allowance is recorded.
Advertising and Promotion
Advertising and promotion costs, including point of sale materials, are expensed as incurred and amounted to $3.4$5.2 million, $3.9$12.0 million, and $2.8$5.6 million for the years ending December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively.
Stock-Based Compensation
The Company measures stock-based compensation costs related to its stock options on the fair value basedvalue-based method under the provisions of ASC 718, Compensation – Stock Compensation. The fair value basedvalue-based method requires compensation cost for stock options to be recognized over the requisite service period based on the fair value of stock options granted. The Company determined the fair value of these awards using the Black-Scholes option pricing model.
56The Company grants performance-based restricted stock units (“PRSU”) subject to both performance-based and service-based vesting conditions. The fair value of each PRSU is the Company’s stock price on the date of grant. For purposes of recognizing compensation expense as services are rendered in accordance with ASC 718, the Company assumes all employees involved in the PRSU grant will provide service through the end of the performance period. Stock compensation expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant.
Risks and Uncertainties
Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The trend in recent years has been toward increased regulation of the tobacco industry.industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.In a number of states targeted flavor bans have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows. Food Drug and Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.
The tobacco industry has experienced and is experiencing significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Master Settlement Agreement (MSA): Forty-six NaN states, certain U.S. territories, and the District of Columbia are parties to the Master Settlement Agreement (“MSA”) and the Smokeless Tobacco Master Settlement Agreement (“STMSA”). To the Company’s knowledge, signatories to the MSA include 49 cigarette manufacturers and/or distributors. The only signatory to the STMSA is US Smokeless Tobacco Company. In the Company’s opinion, the fundamental basis for each agreement is the states’ consents to withdraw all claims for monetary, equitable, and injunctive relief against certain tobacco products manufacturers and others and, in return, the signatories have agreed to certain marketing restrictions and regulations as well as certain payment obligations.
Pursuant to the MSA and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to also include MYO cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account, with sub-accounts on behalf of each settling state. The STMSA has no similar provisions. The MSA escrow accounts are governed by states’ statutes that expressly give the manufacturers the option of opening, funding, and maintaining an escrow account in lieu of becoming a signatory to the MSA. The statutes require companies who are not signatories to the MSA to deposit, on an annual basis, into qualified banks, escrow funds based on the number of cigarettes or cigarette equivalents, i.e., the pounds of MYO tobacco, sold. The purpose of these statutes is expressly stated to be to eliminate the cost disadvantage the settling manufacturers have as a result of entering into the MSA. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgment to that state’s plaintiffs in the event of such a final judgment against the company. Either option – becoming aan MSA signatory or establishing an escrow account – is permissible.
The Company chose to open and fund an MSA escrow account as its means of compliance. It is management’s opinion, due to the possibility of future federal or state regulations, though none have to date been enacted, that entering into one or both of the settlement agreements or establishing and maintaining an escrow account would not necessarily prevent future regulations from having a material adverse effect on the results of operations, financial position, and cash flows of the Company.
Various states have enacted or proposed complementary legislation intended to curb the activity of certain manufacturers and importers of cigarettes that are selling into MSA states without signing the MSA or who have failed to properly establish and fund a qualifying escrow account. To the best of the Company’s knowledge, no such statute has been enacted which could inadvertently and negatively impact the Company, which has been, and is currently, fully compliant with all applicable laws, regulations, and statutes. However, there can be no assurance that the enactment of any such complementary legislation in the future will not have a material adverse effect on the results of operations, financial position, or cash flows of the Company.
Pursuant to the MSA escrow account statutes, in order to be compliant with the MSA escrow requirements, companies selling products covered by the MSA are required to deposit such funds for each calendar year into a qualifying escrow account by April 15 of the following year. At December 31, 2017,2020, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $30.8$32.1 million. The Company will be depositing less than $0.1 million into this account by April 15, 2018, relatingInputs to 2017 sales.the valuation methodology of the MSA escrow deposits when funds are invested include unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date. During 2017, less than $0.1 million relating to 2016 sales was2020 0 monies were deposited into this qualifying escrow account. The investment vehicles available to the Company are specified in the state escrow agreements and are limited to low-risk government securities.
Effective April 1, 2009, the federal excise tax on MYO products was increased from $1.0969 per pound to $24.78 per pound of tobacco. With this significant increase in the federal excise tax, theThe Company discontinued its generic category of MYO. The Company’s MYO in 2019 and itsZig-Zag branded MYO cigarette smoking tobacco line was discontinued in the third quarter of 2017. Thus, pending a change in MSA legislation, the Company has no remaining product lines covered by the MSA and will not be required to make future escrow deposits after making deposits for 2017 sales by April 15, 2018..
The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; thus, any investment inwith an unrealized loss position will be held until the value is recovered, or until maturity. The following shows the fair value of the MSA escrow account as ofAll monies at December 31, 2017:2020 and December 31, 2019 were held in money market savings accounts. 67 | | December 31, | | | | 2017 | | | 2016 | | | | Cost | | | Gross Unrealized Losses | | | Estimated Fair Value | | | Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | Cash and cash equivalents | | $ | 3,602 | | | $ | - | | | $ | 3,602 | | | $ | 2,786 | | | $ | - | | | $ | - | | | $ | 2,786 | | Fair value level 2: U.S. Governmental agency obligations (unrealized loss position < 12 months) | | | 722 | | | | (17 | ) | | | 705 | | | | 29,156 | | | | 19 | | | | (1,551 | ) | | | 27,624 | | Fair value level 2: U.S. Governmental agency obligations (unrealized loss position > 12 months) | | | 27,733 | | | | (1,214 | ) | | | 26,519 | | | | - | | | | - | | | | - | | | | - | | | | $ | 32,057 | | | $ | (1,231 | ) | | $ | 30,826 | | | $ | 31,942 | | | $ | 19 | | | $ | (1,551 | ) | | $ | 30,410 | |
The following shows the maturities
| | December 31, | | | | 2017 | | | 2016 | | Less than five years | | $ | 7,114 | | | $ | 9,113 | | Six to ten years | | | 17,662 | | | | 16,141 | | Greater than ten years | | | 3,679 | | | | 3,902 | | Total U.S. Governmental agency obligations | | $ | 28,455 | | | $ | 29,156 | |
The following shows the amount of deposits by sales year for the MSA escrow account:
| | Deposits | | | Sales Year | | December 31, 2017 | | | December 31, 2016 | | | | | | | | | | | Sales | | | Deposits as of December 31, | | Year | | | 2020 | | | 2019 | | 1999 | | $ | 211 | | | $ | 211 | | | $ | 211 | | | $ | 211 | | 2000 | | | 1,017 | | | | 1,017 | | | | 1,017 | | | | 1,017 | | 2001 | | | 1,673 | | | | 1,673 | | | | 1,673 | | | | 1,673 | | 2002 | | | 2,271 | | | | 2,271 | | | | 2,271 | | | | 2,271 | | 2003 | | | 4,249 | | | | 4,249 | | | | 4,249 | | | | 4,249 | | 2004 | | | 3,715 | | | | 3,715 | | | | 3,714 | | | | 3,714 | | 2005 | | | 4,552 | | | | 4,552 | | | | 4,553 | | | | 4,553 | | 2006 | | | 3,847 | | | | 3,847 | | | | 3,847 | | | | 3,847 | | 2007 | | | 4,167 | | | | 4,167 | | | | 4,167 | | | | 4,167 | | 2008 | | | 3,364 | | | | 3,364 | | | | 3,364 | | | | 3,364 | | 2009 | | | 1,626 | | | | 1,626 | | | | 1,619 | | | | 1,619 | | 2010 | | | 406 | | | | 406 | | | | 406 | | | | 406 | | 2011 | | | 193 | | | | 193 | | | | 193 | | | | 193 | | 2012 | | | 199 | | | | 199 | | | | 199 | | | | 199 | | 2013 | | | 173 | | | | 173 | | | | 173 | | | | 173 | | 2014 | | | 143 | | | | 142 | | | | 143 | | | | 143 | | 2015 | | | 101 | | | | 100 | | | | 101 | | | | 101 | | 2016 | | | 80 | | | | 37 | | | | 91 | | | | 91 | | 2017 | | | 70 | | | | - | | | | 83 | | | | 83 | | | | | | | | | | | | Total | | $ | 32,057 | | | $ | 31,942 | | | $ | 32,074 | | | $ | 32,074 | |
Federal Excise Taxes: Tobacco products, cigarette papers, and cigarette tubes are subject to federal excise taxes. The following table outlines the federal excise tax rate by product category effective as of April 1, 2009:
Product
Category
| | Cigarette and Tobacco Rates
effective April 1, 2009
| Cigarettes | | $1.0066 per pack | | | | Large Cigars | | 52.75% of manufacturer's price; cap of $0.4026 per cigar | | | | Little Cigars | | $1.0066 per pack | | | | Pip Tobacco (including Shisha) | | $2.8311 per pound | | | | Chewing Tobacco | | $0.5033 per pound | | | | Snuff | | $1.51 per pound | | | | RYO/MYO and Cigar Wrappers | | $24.78 per pound | | | | Cigarette Papers | | $0.0315 per 50 papers | | | | Cigarette Tubes | | $0.063 per 50 tubes |
Any future enactment of increases in federal excise taxes on the Company’s products could have a material adverse effect on the results of operations or financial condition of the Company. The Company is unable to predict the likelihood of passage of future increases in federal excise taxes. As of December 31, 2017,2020, federal excise taxes are not assessed on e-cigarettes and related products.
As of December 31, 2017, California, Louisiana, Minnesota, North Carolina, Pennsylvania, West Virginia2020, nearly half of the states and the District of Columbia have ancertain localities impose excise taxtaxes on e-cigarettes.electronic cigarettes and/or liquid vapor. In addition, there are several local taxing jurisdictions with an excise tax on e-cigarettes. Several states have also implemented additional measures on e-cigarettes, such as licensing and age restrictions.requirements.
Food and Drug Administration (“FDA”): FDA: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) authorized the Food and Drug Administration (“FDA”)FDA to immediately regulate the manufacture, sale, and marketing of four4 categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to additionally regulate cigars, pipe tobacco, e-cigarettes, vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA.
The FDA assesses tobacco product user fees on six6 classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.
PriorIn August 2016, the FDA’s regulatory authority under the Tobacco Control Act (the “TCA”) was extended to October 1, 2016, these FDA user fees applied only to thoseall tobacco products then regulatednot previously covered, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. Effective October 1, 2016,These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA began additionally applyinghas since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids.
Under the deeming regulations, the FDA user feeshas responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as of February 15, 2007. There are 3 pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).
We submitted premarket filings prior to newly deemed tobaccothe September 9, 2020 deadline for certain of our products and intend to supplement and complete the applications within FDA’s discretionary timeline. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must demonstrate that a new product either has the same characteristics as its predicate product or different characteristics, but does not raise different questions of public health. FDA is required under a court order to issue a decision related to the authorization of these products within twelve months; otherwise, these products cease to be subject to the FDA’s continued compliance policy, which allows products to be marketed pending premarket review. FDA user fees as described above, i.e., cigarsmay, in its discretion and pipe tobacco.on a case-by-case basis, deviate from this policy.
On July 28, 2017,FDA has issued a number of rules related to premarket filings; however, those rules were not finalized until after September 9, 2020. As such, it is unclear whether and how FDA will apply any new or additional requirements to currently pending applications. We believe we have products that meet the requisite standards and have filed premarket filings supporting a showing of the respective required standard. However, there is no assurance that the FDA’s guidance or ultimate regulation will not change, or that the FDA announcedwill review and authorize the products in the requisite time period or that, in that circumstance, the FDA will use its discretion on a new directioncase-by-case basis to allow for the continued marketing of the products, or that unforeseen circumstances will not arise that prevent us from sufficiently supplementing or completing our applications or otherwise increase the amount of time and money we are required to spend to receive all necessary marketing orders. Although we filed many premarket applications in regulating tobaccoa timely manner, no assurance can be given that the applications will ultimately be successful. This may result in the prioritization of supplementing or completing applications for high priority SKUs in our inventory position, which could adversely impact future revenues.
In addition, we currently distribute many third-party manufactured vapor products includingfor which we will be completely dependent on the newly “deemed” markets such as cigars and vapor products. The FDA stated it intends to begin several new rulemaking processes, some of which will outline foundational rules governingmanufacturer complying with the premarket application processfiling requirements. There can be no assurance that these third-party products will receive a marketing order. While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the deemedmarketplace or can fully displace third-party products including Substantial Equivalence Applicationsthat are currently being distributed by us, which could adversely affect our results of operations and Premarket Tobacco Applications. Compliance and related costs couldliquidity. For a period of time after the filing deadline, we expect there to be significant and could increasea lack of enforcement, which may adversely affect our ability to compete in the costs of operating in our NewGen segment. The original filing deadlines for newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe) and August 8, 2022, for “non-combustible” products (e.g., vapor products). No other filing deadlines were altered. Themarketplace against those who continue to sell unauthorized products.
In January 2020, FDA also acknowledgedissued a “continuum of risk” among tobacco products (i.e., certain tobacco products pose a greater risk to individual and public health than others),Guidance document (the “January 2020 Guidance”) that it intends to seek public comment on the role flavors play in attracting youth and the role flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery, and thatstated it would be increasingprioritizing enforcement of several categories of electronic nicotine delivery system (“ENDS”) products: (1) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products; (2) ENDS products for which the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; (3) ENDS products targeted to minors or whose marketing is likely to promote the use of ENDS by minors; and (4) ENDS products offered for sale after May 12, 2020, premarket application deadline (later updated to reflect the September 9, 2020 filing deadline) for which the manufacturer has not submitted a premarket application. The policy outlined several factors the agency would consider in its focus on the regulationenforcement of cigarette products.
Consumer Product Safety Commission (“CPSC”): On July 26, 2016, the CPSC began requiring that e-liquid containers be packaged in child-resistant packaging,flavored cigars going forward but did not restrict those products as outlinedit had considered in the Poison Prevention Packaging Act. WeMarch 2019 Guidance proposal. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket filings.
Prevent All Cigarette Trafficking Act (“PACT Act”): On December 27, 2020, President Trump signed the Further Consolidated Appropriations Act, 2021, into law. This law included an amendment to the Jenkins Act expanding the definition of “cigarette” to include “electronic nicotine delivery systems,” or ENDS, and requires that the United States Postal Service (USPS) promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS. Failure to comply with the PACT Act could result in significant financial or criminal penalties. To the extent we are not ableunable to predict whether additional packagingrespond to, or comply with, these new requirements, willthere could be necessary fora material adverse effect on our e-liquid products in the future.business, results of operations and financial condition.
Concentration of Credit Risk:At December 31, 20172020 and 2016,2019, the Company had bank deposits, including MSA escrow accounts, in excess of federally insured limits of approximately $5.0$69.7 million and $5.2$126.0 million, respectively. During 2016,2019, the Company chose to begin investinginvested a portion of the MSA escrow accounts intoin U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. The Company sells its products to distributors, and retail establishments, and consumers throughout the United States and also sells Zig-Zag® premium cigarette papers in Canada.Canada and some smaller quantities in other countries. The Company had no0 customers that accounted for more than 10% of gross, annualnet sales for 2017, 2016,2020, 2019, or 2015.2018. The Company performs periodic credit evaluations of its customers and generally does not require collateral on trade receivables. Historically, the Company has not experienced significant credit losses.
Accounts Receivable
Accounts receivable are recognized at their net realizable value. All accounts receivable are trade related, recorded at the invoiced amount, and do not bear interest. The Company maintains allowances for doubtful accounts receivable for estimated uncollectible invoices resulting from a customer’s inability to pay (bankruptcy, out of business, etc., i.e. “bad debt” which results in write-offs). The activity of allowance for doubtful accounts during 20172020 and 20162019 is as follows:
| | 2017 | | | 2016 | | | December 31, 2020 | | | December 31, 2019 | | Balance at beginning of period | | $ | 35 | | | $ | 137 | | | $ | 280 | | | $ | 42 | | Additions to allowance account during period | | | 46 | | | | | | | | 86 | | | | 238 | | Deductions of allowance account during period | | | (64 | ) | | | (117 | ) | | | (216 | ) | | | 0 | | Other | | | - | | | | 15 | | | Balance at end of period | | $ | 17 | | | $ | 35 | | | $ | 150 | | | $ | 280 | |
Recent Accounting Pronouncements Adopted
The Company adoptedIn June 2016, the Financial Accounting Standards UpdateBoard (“ASU”FASB”) 2017-04, Intangibles-Goodwillissued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and Other (Topic 350): Simplifying the Test for Goodwill Impairment in Q1 of 2017 on a prospective basis.other financial instruments held by financial institutions and other organizations. This ASU simplifiesapplies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. The ASU replaced the measurementprevious incurred loss impairment methodology with a methodology to reflect current expected credit losses (“CECL”) and requires consideration of goodwill by eliminating Step 2 froma broader range of reasonable and supportable information to explain credit loss estimates. The guidance was adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the goodwill impairment test.period of adoption. The adoptionASU was effective for the Company beginning in the first quarter of the2020. The ASU had no effect ondid not have an impact to the Company’s consolidated financial statements.statements and related disclosures.
The Company adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory in Q1 of 2017 on a prospective basis. Amendments in this ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The adoption of this ASU had no effect on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
In May 2014,August 2018, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The underlying principle is that an entity will recognize revenue to depict2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the transfer of goods or services to customers at an amount that the entity expects to be entitled torequirements for capitalizing implementation costs in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized: (i) identify thecloud computing arrangement service contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. Other major provisions include capitalization of certain contractrequirements for capitalizing implementation costs consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.incurred for an internal-use software license. The guidance also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. ASU 2014-09 is effective for interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method.2019, with early adoption permitted. The Company has elected to use the modified retrospective transition method. The Company has completed its assessment and does not expect there will be a significant impact on the timing or amount of revenue recognition, or on net income, upon adoption ofadopted ASU 2014-09. Therefore, the Company will not be required to make a cumulative effect adjustment to beginning retained earnings upon adoption of ASU 2014-09 on2018-15 effective January 1, 2018.2020. The ASU did not have an impact to the Company’s financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016,December 2019, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU 2016-02 requires a lessee to recognizewill be effective beginning in the statementfirst quarter of the Company’s fiscal year 2021. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact this ASU will have on the financial position a liability to make lease payments (the lease liability)statements and a right-of-use asset representing its right to userelated disclosures.
In August 2020, the underlying assetFASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This guidance simplifies the accounting for convertible debt instruments by reducing the lease term. For leases with a termnumber of 12 months or lessaccounting models and the number of embedded conversion features that could be recognized separately from the convertible instrument. This guidance also enhances transparency and improves disclosures for which thereconvertible instruments and earnings per share guidance. This ASU is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lesseeeffective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures along with specific quantitative disclosures will be required so that users are able to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective forbut no earlier than fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. At transition, lessees are required to recognize and measure leases at2020. This update permits the beginninguse of either the earliest period presented using a modified retrospective approach, which includes a numberor fully retrospective method of optional practical expedients related to the identification and classification of leases that commenced before the effective date of ASU 2016-02. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.transition. The Company is currently evaluatingwill early adopt this ASU effective January 1, 2021 using the effect the adoptionfull retrospective method of this standardtransition. The ASU will have on its financial statements.increase reported debt by approximately $25 million, decrease interest expense by approximately $7.0 million annually and increase weighed average diluted common shares outstanding by approximately 3.2 million shares. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an entity to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. ASU 2017-07 is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company does not believe the adoption of this standard will have an effect on its financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU allows entities to make a one-time reclassification from accumulated other comprehensive income (AOCI) to retained earnings for the effects of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate by the Tax Cut and Jobs Act (“TCJA”). The effective date for all entities that elect to make the reclassification is for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in financial statements for fiscal years or interim periods that have not been issued or made available for issuance as of February 14, 2018. Upon adoption, an entity can elect to apply the guidance either: (a) at the beginning of the period (annual or interim) of adoption or (b) retrospectively to each period (or periods) in which the income tax effects of the TCJA related to items remaining in AOCI are recognized. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.
Note 3. Initial Public Offering (“IPO”):Acquisitions
ReCreation Marketing
In April of 2016,July 2019, the Company increasedobtained a 30% stake in a Canadian distribution entity, ReCreation for $1 million paid at closing. In November 2020, the total authorized shares of preferredCompany invested an additional $1 million related to our 30% stake. In November 2020, The Company also invested an additional $2 million increasing its ownership interest to 50%. We received board seats aligned with our ownership position. The Company also provided a $2.0 million unsecured loan to ReCreation bearing interest at 8% per annum and votingmaturing November 19, 2022. As discussed in Note 1, the Company has determined that ReCreation is a VIE due its required subordinated financial support. The Company has determined it is the primary beneficiary due its 50% equity interest, additional subordinated financing and non-voting common stock and effected a 10.43174381distribution agreement with ReCreation for 1 stock splitthe sale of the voting and non-voting common stock.Company’s products. As a result, the Company began consolidating ReCreation effective November 2020. As of December 31, 2020, the Company had not completed the accounting for the acquisition. The following table summarizes the consideration transferred and calculation of goodwill based on excess of the stock split, all previously reported share amounts (including optionsacquisition price over the estimated fair value of the identifiable net assets acquired and warrants)are based on management’s preliminary estimates:
Total consideration transferred | | $ | 4,000 | | Adjustments to consideration transferred: | | | | | Cash acquired | | | (3,711 | ) | Working capital | | | 418 | | Intercompany debt eliminated | | | 2,000 | | Adjusted consideration transferred | | | 2,707 | | Assets acquired: | | | | | Working capital (primarily AR and inventory) | | | 1,551 | | Fixed assets and Other long term assets | | | 70 | | Other liabilities | | | (203 | ) | Non-controlling interest | | | (4,050 | ) | Net assets acquired | | $ | (2,632 | ) | | | | | | Goodwill | | $ | 5,339 | |
The goodwill of $5.3 million consists of the synergies expected from combining the operations and is currently not deductible for tax purposes.
Standard Diversified Inc. (“SDI”)
On July 16, 2020, the Company completed its merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of the Company in a tax-free downstream merger. Under the terms of the merger, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the accompanying financial statementsaggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock at the time of the merger. SDI divested its assets, other than SDI’s TPB Common Stock, prior to close such that the net liabilities at closing were minimal and related notes have been retrospectively restatedthe only assets that SDI retained were the remaining TPB Common Stock holdings. The transaction was accounted for as an asset purchase for $236.0 million in consideration, comprised of 7,934,704 shares of TPB Common Stock valued at $234.3 million plus transaction costs and assumed net liabilities. $236.0 million was assigned to reflect the stock split.8,178,918 shares of TPB Common Stock acquired. Shares of TPB Common Stock acquired in excess of the shares issued were retired. The Company no longer has a controlling shareholder and 244,214 shares of TPB Common Stock were retired resulting in a charge of $1.7 million recorded in Accumulated earnings (deficit).
Durfort Holdings
In May of 2016,June 2020, the Company sold 6,210,000 shares of voting common stock in its IPO at a price of $10.00 per share. The gross proceeds totaled $62.1 million. The IPO proceeds were used as follows: (i) $3.9 millionpurchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for the payment of expenses in connection with the IPO; (ii) $3.3 million to purchase and retire Intrepid Warrants (See Note 17, for definition and information); (iii) $34.0 million to redeem and retire PIK Toggle Notes (See Note 12, for definition and information); (iv) $20.2 million to redeem and retire $20.0$47.7 million in principal amounttotal consideration, comprised of Second Lien Term Notes$37.7 million in cash, including $1.7 million of capitalized transaction costs, and pay $0.2a $10.0 million as a 1% prepayment penalty (See Note 12, for definition and information); (v) $0.7 million to purchase and retire all outstanding options to buy Intrepid Common Units which include $22 of payroll taxes (See Note 17, for definition and information); and (vi) increased cash of $83.
In addition, in connection with the IPOunsecured subordinated promissory note (“Promissory Note”). With this transaction, the Company also: 1) issued 1,289,819 sharesacquired co-ownership in the intellectual property rights of voting common stock in exchange for all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones. The Company also entered into an exclusive Master Distribution Agreement to market and sell the outstanding 7% Senior Notes (See Note 12); 2) issued 3,168,438 sharesoriginal Blunt Wrap® cigar wraps within the USA which was effective October 9, 2020. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of voting common stocknew products in exchangethe smoking alternative market since 1997 and has secured patents in the USA and internationally for all of the remaining outstanding PIK Toggle Notes not repurchasednovel smoking wrappers and cones. The transaction was accounted for cash as described above (See Note 12);an asset purchase with $42.2 million assigned to intellectual property, which has an indefinite life, and 3) paid $2.3 million to retire all the remaining Intrepid Warrants (for a total expenditure of $5.5 million assigned to retire all the Intrepid Warrants).Master Distribution Agreement, which has a 15 year life. Both assets are currently deductible for tax purposes.
The Company had the following voting and non-voting shares of common stock outstanding after the transactions summarized above:
Voting shares outstanding before transactions | | | 6,259,480 | | Shared issued in the Initial Public Offering | | | 6,210,000 | | Shares issued for 7% Senior Notes | | | 1,289,819 | | Shares issued for PIK Toggle Notes | | | 3,168,438 | | Voting shares outstanding after transactions | | | 16,927,737 | | Non-voting shares outstanding before and after transactions | | | 938,857 | |
Solace Technologies
In June 2016, the Board of Directors ofJuly 2019, the Company approvedpurchased the conversionassets of 938,857 sharesE-Vape 12, Inc and Solace Technologies LLC (“Solace”) for $9.4 million in total consideration, comprised of non-voting common stock to shares$7.7 million in cash, $1.1 million earn-out fair value, and $0.5 million holdback for 18 months, which was adjusted by $0.2 million for a working capital deficiency. The earn-out consists of voting common stock. In August 2016, Standard General, L.P. (“Standard General”), exercised warrants to purchase 442,55844,295 shares of the Company’s common stock.
Thestock to be issued to the former owners upon the achievement of certain annual milestones. Immediately following schedule shows the change in activityacquisition, 88,582 PRSUs with a fair value of $4.62 million were issued to former owners who became employees. See Note 17, “Share Incentive Plans”, for further details. Solace is an innovative product development company that has grown from the IPOcreator of one of the leading vape juice brands in May 2016 to December 31, 2017:
Voting shares outstanding after transactions above | | | 16,927,737 | | Non-voting shares converted to voting shares | | | 938,857 | | Voting shares issued as restricted stock, net of forfeitures | | | 25,944 | | Voting shares issued upon exercise of stock options | | | 66,926 | | Voting shares issued upon exercise of warrants | | | 442,558 | | Voting shares outstanding at December 31, 2016 | | | 18,402,022 | | Voting shares issued upon exercise of stock options, net | | | 813,442 | | Forfeitures of restricted stock | | | (4,831 | ) | Voting shares outstanding at December 31, 2017 | | | 19,210,633 | |
Note 4. Acquisitions:
Vapor Shark
In March 2017, the Company enteredindustry into a strategic partnership with Vapor Shark in which the Company committed to make a deposit up to $2.5 million to Vapor Shark in exchange for a warrant to purchase 100%leader of the equity interest in Vapor Shark on or before April 15, 2018. In the event the Company exercised the warrant, the Company granted Vapor Shark’s sole shareholder the option to purchase from Vapor Shark the retail stores it owns effective as of January 1, 2018. In April 2017, the Company entered into a management agreement with Vapor Shark whereby the Company obtained control of the operations.
As a result of the management agreement, Vapor Shark became a VIE.alternative ingredients product development. The Company determined that it wasintends to incorporate Solace’s innovative products as well as the primary beneficiary and consolidated Vapor Shark as of April 1, 2017. Since Vapor Shark is a business, the Company accounted for the consolidation of the VIE as if it were an acquisition and recorded the assets and liabilities at fair value.legacy vapor products into our Nu-X development engine. The Company exercised its warrant on June 30, 2017, and obtained 100% ownership of Vapor Shark as of that date for a nominal purchase price. There was no goodwill assigned as a result ofcompleted the transaction. The Company acquired $3.9 million in assets and assumed $3.9 million in liabilities, which included a liability of $0.6 million relating to the option provided to Vapor Shark’s former sole shareholder to purchase the Vapor Shark branded retail stores it owns.
In December 2017, the Company offered to pay Vapor Shark’s former sole shareholder $1.5 million in exchange for his option to purchase the company-owned stores. The agreement was finalized in January 2018, and the Company paid $1.0 million in February 2018 with the remaining $0.5 million to be paid in 24 monthly installments. As a result of the transaction a $0.9 million charge was recorded, and is included, in selling, general, and administrative expenses in 2017.
VaporBeast
On November 30, 2016, the Company acquired all of the outstanding stock of VaporBeast for total consideration of $27.0 million, net of a working capital adjustment of $0.4 million. The purchase price was satisfied through $4.0 million in cash at closing, $19.0 million in short-term notes paid in December 2016, plus $4.0 million in payments deferred for eighteen months. Accountingaccounting for the acquisition was completed in 2017 and resulted in an increase to goodwill of $0.2 million.during the third quarter 2020. The following purchase price and goodwill are based on the excess of the acquisition price over the estimated fair value of the tangible and intangible assets acquired.acquired:
Total consideration transferred | | $ | 9,405 | | Adjustments to consideration transferred: | | | | | Cash acquired | | | (45 | ) | Working capital | | | (235 | ) | Adjusted consideration transferred | | | 9,125 | | Assets acquired: | | | | | Working capital (primarily AR and inventory) | | | 1,132 | | Fixed assets and Other long term assets | | | 414 | | Intangible assets | | | 1,352 | | Other liabilities | | | (209 | ) | Net assets acquired | | $ | 2,689 | | | | | | | Goodwill | | $ | 6,436 | |
Purchase price: | | | | Total purchase price | | $ | 27,000 | | Adjustments to purchase price: | | | | | Working capital | | | (400 | ) | Fair value of holdback | | | (128 | ) | Adjusted purchase price | | $ | 26,472 | | | | | | | Assets acquired: | | | | | Working capital | | $ | 4,270 | | Property and equipment | | | 7 | | Other intangible assets | | | 16,272 | | Net assets acquired | | $ | 20,549 | | | | | | | Goodwill | | $ | 5,923 | |
The goodwill of $5.9$6.4 million consists of expectedthe synergies and scale expected from combining the operations with our previously developed NewGen platform and is currently deductible for tax purposes.
Wind River
On November 18, 2016, the Company purchased five chewing tobacco brands from Wind River Tobacco Company (“Wind River”) for $2.5 million. The Company paid $0.6 million at closing with the remaining $1.9 million payable quarterly through November 2019, of which $1.3 million was outstanding at December 31, 2017. The transaction was accounted for as an asset purchase with the fair value of the purchase price of $2.4 million assigned to trade names, which have an indefinite life.
Note 5. 4. Derivative Instruments
Foreign Exchange Contracts:Currency
The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. During 2017, we executed no forward contracts. During 2016, we2020, the Company executed various forward contracts, none of which met hedge accounting requirements, for the purchase of €5.6€19.7 million and sale of €21.4 million with maturity dates ranging from January 26, 2017,December 2020 to July 17, 2017.November 2021. The Company did 0t execute any forward contracts during 2019. At December 31, 2017 and 2016, we2020, the Company had forward contracts for the purchase of €0€18.0 million and €4.9sale of €19.6 million. The foreign currency contracts’ fair value at December 31, 2020, resulted in an asset of $0.4 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities. At December 31, 2019, the Company had 0 forward contracts.
Interest Rate Swaps
The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at December 31, 2020, and December 31, 2019, resulted in a liability of $3.7 million and $2.5 million, respectively, included in other long-term liabilities. Losses of $1.5 million, $0.3 million and $0.4 million were reclassified into interest expense for the year ending December 31, 2020, 2019 and 2018 respectively.
Note 6.5. Fair Value of Financial Instruments:Instruments
The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents
Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.
Accounts Receivable
The fair value of accounts receivable approximates their carrying value due to their short-term nature.
Revolving Credit FacilityNote Payable – Promissory Note The fair value of the revolving credit facilityPromissory Note approximates its carrying value asof $10.0 million due to the interest rate fluctuates with changes in market rates.recency of the note’s issuance, related to the year ended December 31, 2020. Long-Term DebtNote Payable – Unsecured Loan The fair value of the Unsecured Note approximates its carrying value of $7.5 million due to the recency of the note’s issuance, related to the year ended December 31, 2020.
Note Payable – IVG
The fair value of the IVG Note approximated its carrying value of $4.2 million due to the recency of the note’s issuance, relative to the year ended December 31, 2019.
Long-Term Debt
The Company’s 2018 Credit Facility bears interest at variable rates that fluctuate with market rates. The carrying values of the long-term debt instruments approximate their respective fair values. As of December 31, 2020, the fair value of the 2018 First Lien Term Loan approximated $130.0 million. As of December 31, 2019, the fair value of the 2018 First Lien Term Loan approximated $146.0 million.
The Convertible Senior Notes bear interest at a rate of 2.50% per year. As of December 31, 2020, the fair value approximated $155.3 million, with a carrying value of $172.5 million. As of December 31, 2019, the fair value approximated $140.1 million, with a carrying value of $172.5 million.
See Note 13, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt is estimateddebt.
Foreign Exchange
At December 31, 2020, the Company had forward contracts for the purchase of €18.0 million and sale of €19.6 million. At December 31, 2019, the Company had 0 forward contracts. The fair value of the foreign exchange contracts are based on theupon quoted market prices for similar instruments, thus leading to a level 2 distinction within the same or similar issues or on the current rates offeredfair value hierarchy, and resulted in an asset of $0.4 million and a liability of $0.0 million as of December 31, 2020. As there were 0 open contracts as of December 31, 2019, there is 0 resulting balance sheet position related to the fair value.
Interest Rate Swaps
The Company had swap contracts for debta total notional amount of $70 million at December 31, 2020 and 2019. The fair values of the same remaining maturities.swap contracts are based upon quoted market prices for similar instruments, thus leading to a level 2 distinction within the fair value hierarchy, and resulted in a liability of $3.7 million and $2.5 million, respectively, as of December 31, 2020 and 2019.
As of December 31, 2017, the fair values of the 2017 First Lien Term Loans and the 2017 Second Lien Term Loan approximated $140.6 million and $56.1 million, respectively. See ‘Note 12: Notes Payable and Long-Term Debt’ for details regarding our credit facilities.
As of December 31, 2016, the fair values of the First Lien Term Loans and the Second Lien Term Loan approximated $147.3 million and $60.0 million, respectively. See ‘Note 12: Notes Payable and Long-Term Debt’ for details regarding our credit facilities.
Foreign Exchange
At December 31, 2017 and 2016, we had forward contracts for the purchase of €0 and €4.9 million, respectively. The fair value of the foreign exchange contracts were based upon the quoted market price that resulted in an insignificant liability as of December 31, 2016.
Note 7. Inventories:6. Inventories
The components of inventories at December 31 are as follows:
| | 2017 | | | 2016 | | | December 31, 2020 | | | December 31, 2019 | | Raw materials and work in process | | $ | 2,545 | | | $ | 2,596 | | | $ | 8,137 | | | $ | 7,050 | | Leaf tobacco | | | 30,308 | | | | 27,391 | | | | 32,948 | | | | 32,763 | | Finished goods - smokeless products | | | 5,834 | | | | 4,789 | | | Finished goods - smoking products | | | 14,110 | | | | 18,384 | | | Finished goods - electronic/vaporizer products | | | 14,532 | | | | 11,993 | | | Finished goods - Zig-Zag Products | | | | 14,903 | | | | 13,138 | | Finished goods - Stoker’s Products | | | | 9,727 | | | | 5,680 | | Finished goods - NewGen Products | | | | 18,916 | | | | 17,111 | | Other | | | 1,290 | | | | 1,232 | | | | 1,225 | | | | 989 | | | | | 68,619 | | | | 66,385 | | | Gross Inventory | | | | 85,856 | | | | 76,731 | | LIFO reserve | | | (5,323 | ) | | | (4,200 | ) | | | (6,106 | ) | | | (5,752 | ) | | | $ | 63,296 | | | $ | 62,185 | | | Net Inventory | | | $ | 79,750 | | | $ | 70,979 | |
The following represents the inventory valuation allowance roll-forward, for the years ended December 31:
| | 2017 | | | 2016 | | | 2020 | | | 2019 | | Balance at beginning of period | | $ | (600 | ) | | $ | (305 | ) | | $ | (21,502 | ) | | $ | (2,504 | ) | | | | | | | | | | | Charged to cost and expense | | | (469 | ) | | | (566 | ) | | | (2,867 | ) | | | (20,001 | ) | Deductions for inventory disposed | | | 805 | | | | 527 | | | | 14,445 | | | | 1,003 | | Other | | | (195 | ) | | | (256 | ) | | Balance at end of period | | $ | (459 | ) | | $ | (600 | ) | | $ | (9,924 | ) | | $ | (21,502 | ) |
Note 7. Other Current Assets
Other current assets consists of:
| | December 31, 2020 | | | December 31, 2019 | | Inventory deposits | | $ | 7,113 | | | $ | 4,012 | | Insurance deposit | | | 3,000 | | | | 0 | | Prepaid taxes | | | 813 | | | | 3,673 | | Other | | | 15,525 | | | | 8,430 | | Total | | $ | 26,451 | | | $ | 16,115 | |
Note 8. Property, Plant and Equipment:Equipment
Property, plant and equipment at December 31 consists of:
| | 2017 | | | 2016 | | | December 31, 2020 | | | December 31, 2019 | | Land | | $ | 22 | | | $ | 22 | | | $ | 22 | | | $ | 22 | | Buildings and improvements | | | 2,072 | | | | 1,899 | | | | 2,750 | | | | 2,655 | | Leasehold improvements | | | 1,873 | | | | 1,666 | | | | 4,702 | | | | 2,567 | | Machinery and equipment | | | 12,635 | | | | 10,532 | | | | 15,612 | | | | 14,516 | | Furniture and fixtures | | | 3,821 | | | | 3,409 | | | | 9,025 | | | | 8,502 | | | | | 20,423 | | | | 17,528 | | | Gross property, plant and equipment | | | | 32,111 | | | | 28,262 | | Accumulated depreciation | | | (11,564 | ) | | | (9,938 | ) | | | (16,587 | ) | | | (14,446 | ) | | | $ | 8,859 | | | $ | 7,590 | | | Net property, plant and equipment | | | $ | 15,524 | | | $ | 13,816 | |
Note 9. Deferred Financing Costs
Deferred financing costs relating to the revolving credit facility consist of:
| | December 31, 2020 | | | December 31, 2019 | | Deferred financing costs, net of accumulated amortization of $705 and $410, respectively | | $ | 641 | | | $ | 890 | |
Note 10. Goodwill and Other Intangible Assets:Assets
The following table summarizes goodwill by segment:
| | Smokeless | | | Smoking | | | NewGen | | | Total | | Balance as of January 1, 2016 | | $ | 32,590 | | | $ | 96,107 | | | $ | - | | | $ | 128,697 | | Acquisitions | | | - | | | | - | | | | 5,693 | | | | 5,693 | | Balance as of December 31, 2016 | | | 32,590 | | | | 96,107 | | | | 5,693 | | | | 134,390 | | Adjustments | | | - | | | | - | | | | 230 | | | | 230 | | Balance as of December 31, 2017 | | $ | 32,590 | | | $ | 96,107 | | | $ | 5,923 | | | $ | 134,620 | |
| | Zig-Zag | | | Stoker’s | | | NewGen | | | Total | | Balance as of December 31, 2018 | | $ | 96,107 | | | $ | 32,590 | | | $ | 17,242 | | | $ | 145,939 | | | | | | | | | | | | | | | | | | | Adjustments | | | 0 | | | | 0 | | | | 1,907 | | | | 1,907 | | Acquisitions | | | 0 | | | | 0 | | | | 6,436 | | | | 6,436 | | Balance as of December 31, 2019 | | $ | 96,107 | | | $ | 32,590 | | | $ | 25,585 | | | $ | 154,282 | | | | | | | | | | | | | | | | | | | Acquisitions | | | 5,339 | | | | 0 | | | | 0 | | | | 5,339 | | Balance as of December 31, 2020 | | $ | 101,446 | | | $ | 32,590 | | | $ | 25,585 | | | $ | 159,621 | |
The following tables summarize information about the Company’s allocation of other intangible assets. Gross carrying amounts of unamortized, indefinite life intangible assets relating to Stoker’s and Wind River in the Smokeless segment and VaporBeast in the NewGen segment are shown below:
| | As of December 31, | | | | | 2017 | | | 2016 | | | December 31, 2020 | | | December 31, 2019 | | | | Smokeless | | | NewGen | | | Total | | | Smokeless | | | NewGen | | | Total | | | Zig-Zag | | | Stoker’s | | | NewGen | | | Total | | | Stoker’s | | | NewGen | | | Total | | Unamortized, indefinite life intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trade names | | $ | 10,871 | | | $ | 10,786 | | | $ | 21,657 | | | $ | 10,871 | | | $ | 10,786 | | | $ | 21,657 | | | $ | 0 | | | $ | 8,500 | | | $ | 10,786 | | | $ | 19,286 | | | $ | 10,871 | | | $ | 10,786 | | | $ | 21,657 | | Formulas | | | 53 | | | | - | | | | 53 | | | | 53 | | | | - | | | | 53 | | | | 42,245 | | | | 53 | | | | 0 | | | | 42,298 | | | | 53 | | | | 0 | | | | 53 | | Total | | $ | 10,924 | | | $ | 10,786 | | | $ | 21,710 | | | $ | 10,924 | | | $ | 10,786 | | | $ | 21,710 | | | $ | 42,245 | | | $ | 8,553 | | | $ | 10,786 | | | $ | 61,584 | | | $ | 10,924 | | | $ | 10,786 | | | $ | 21,710 | |
Amortized intangible assets relating to the purchase of VaporBeast, included within the NewGen segment consistconsists of:
| | As of December 31, | | | | | 2017 | | | 2016 | | | December 31, 2020 | | | December 31, 2019 | | | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying | | | Accumulated Amortization | | | Gross Carrying | | | Accumulated Amortization | | Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | Customer relationships (useful life of 8 years) | | $ | 5,386 | | | $ | 729 | | | $ | 5,386 | | | $ | 55 | | | Customer relationships (useful life of 8-10 years) | | | $ | 6,936 | | | $ | 3,111 | | | $ | 6,936 | | | $ | 2,283 | | Trade names (useful life of 15 years) | | | | 9,530 | | | | 1,375 | | | | 7,158 | | | | 714 | | Master distribution agreement (useful life of 15 years) | | | | 5,489 | | | | 183 | | | | 0 | | | | 0 | | Franchise agreements (useful life of 8 years) | | | | 780 | | | | 228 | | | | 780 | | | | 130 | | Non-compete agreements (useful life of 3.5 years) | | | 100 | | | | 31 | | | | 100 | | | | 3 | | | | 100 | | | | 100 | | | | 100 | | | | 88 | | Total | | $ | 5,486 | | | $ | 760 | | | $ | 5,486 | | | $ | 58 | | | $ | 22,835 | | | $ | 4,997 | | | $ | 14,974 | | | $ | 3,215 | |
Note 10. Deferred Financing Costs:During 2020, $2.4 million in trade names related to Wind River Brands in the Stoker’s Product segment were determined to no longer be indefinite lived and began to be amortized. Annual amortization expense for each of the next five years is estimated to be approximately $1.9 million for 2021 through 2024 and $1.2 million for 2025, assuming no additional transactions occur that require the amortization of intangible assets.
Deferred financing costs relating to the revolving credit facility at December 31 consist of:
| | 2017 | | | 2016 | | Deferred financing costs, net of accumulated amortization of $134 and $202, respectively | | $ | 630 | | | $ | 139 | |
Note 11. Accrued Liabilities:
Accrued liabilities at December 31 consist of:
| | 2017 | | | 2016 | | Accrued payroll and related items | | $ | 5,683 | | | $ | 5,331 | | Customer returns and allowances | | | 2,707 | | | | 2,818 | | Other | | | 9,839 | | | | 7,187 | | | | $ | 18,229 | | | $ | 15,336 | |
Note 11. Other Assets
Other assets consists of:
| | December 31, 2020 | | | December 31, 2019 | | Equity investments | | $ | 24,018 | | | $ | 5,421 | | Pension assets | | | 0 | | | | 1,686 | | Other | | | 2,818 | | | | 3,566 | | Total | | $ | 26,836 | | | $ | 10,673 | |
In October 2020, the Company acquired a 20% stake in Wild Hempettes LLC (“Wild Hempettes”), a leading manufacturer of hemp cigarettes under the WildHemp™ and Hempettes™ brands, for $2.5 million. The Company has options to increase its stake to a 100% ownership position based on certain milestones. As part of the transaction, the Wild Hempettes joint venture was spun off from Crown Distributing LLC and formed as a vehicle for the Company to be the exclusive distributor of Hempettes™ to U.S. bricks and mortar retailers under a profit-sharing arrangement. The Company has provided Wild Hempettes with a secured line of credit up to $2.0 million with a term up to 5 years. The Company accounts for its investment in Wild Hempettes as an equity method investment. The Company recorded investment income of $0.1 million for 2020. Purchases of inventory from Wild Hempettes was $0.5 million in 2020. There were 0 amounts outstanding at December 31, 2020.
In October 2020, the Company invested $15.0 million in dosistTM, a global cannabinoid company, with an option to invest an additional $15.0 million on pre-determined terms over the next 12 months. The Company received a warrant to receive preferred shares of dosistTM that will automatically be exercised upon the changing of federal laws in the United States, rescheduling cannabis and/or permitting the general cultivation, distribution and possession of cannabis. There were 0 purchases of inventory from dosistTM in 2020. In October 2020, the Company invested $1.8 million in BOMANI Cold Buzz, LLC (“BOMANI”), a manufacturer of alcohol-infused cold brew coffee. The Company received rights to receive equity in BOMANI in the event of an equity financing. There were 0 purchases of inventory from BOMANI in 2020. The Company has a minority ownership position in Canadian American Standard Hemp (“CASH”). CASH is headquartered in Warwick, Rhode Island, and manufactures cannabidiol isolate (“CBD”) developed through highly efficient and proprietary processes. The investment in CASH positions the Company to participate in the market for hemp-derived products. In the fourth quarter 2019 CASH completed a fundraising round, resulting in the fair value of our investment increasing to $4.0 million. This resulted in a gain of $2 million which is recorded in investment income for 2019. In October 2020, CASH merged with Real Brands, Inc. (“Real Brands”), an over the counter traded shell company. CASH will continue business under the Real Brands name. The Company maintained its ownership position in Real Brands subsequent to the merger. Purchases of inventory from CASH were $0.0 million and $0.6 million in 2020 and 2019, respectively. There were 0 amounts outstanding at December 31, 2020 and 2019. In December 2018, the Company acquired a minority ownership position in General Wireless Operations, Inc. (d/b/a RadioShack; “RadioShack”) from 5G gaming LLC, which is owned by Standard General LP, for $0.4 million. Standard General LP has a controlling interest in the Company and qualifies as a related party. The Company will work together with RadioShack on product development and sourcing teams in China. Furthermore, the Company paid $0.0 and 0.2 million in consulting fees in 2020 and 2019, respectively. There were 0 amounts outstanding at December 31, 2020 and 2019.
Note 12. Accrued Liabilities
Accrued liabilities at consists of:
| | December 31, 2020 | | | December 31, 2019 | | Accrued payroll and related items | | $ | 9,459 | | | $ | 5,267 | | Customer returns and allowances | | | 5,259 | | | | 6,160 | | Taxes payable | | | 4,326 | | | | 705 | | Lease liabilities | | | 3,228 | | | | 2,218 | | Accrued interest | | | 2,096 | | | | 1,909 | | Other | | | 10,857 | | | | 10,261 | | Total | | $ | 35,225 | | | $ | 26,520 | |
Note 13. Notes Payable and Long-Term Debt:Debt
Notes payable and long-term debt at December 31 consists of the following in order of preference:
| | 2017 | | | 2016 | | 2017 First Lien First Out Term Loan | | $ | 105,875 | | | $ | - | | 2017 First Lien Second Out Term Loan | | | 34,738 | | | | - | | 2017 Second Lien Term Loan | | | 55,000 | | | | - | | Note payable - VaporBeast | | | 2,000 | | | | 2,000 | | First Lien Term Loan | | | - | | | | 146,451 | | Second Lien Term Loan | | | - | | | | 59,128 | | Total notes payable and long-term debt | | | 197,613 | | | | 207,579 | | Less deferred finance charges | | | (3,573 | ) | | | (4,388 | ) | Less current maturities | | | (7,850 | ) | | | (1,650 | ) | | | $ | 186,190 | | | $ | 201,541 | |
| | December 31, 2020 | | | December 31, 2019 | | 2018 First Lien Term Loan | | $ | 130,000 | | | $ | 146,000 | | Convertible Senior Notes | | | 172,500 | | | | 172,500 | | Note payable - Promissory Note | | | 10,000 | | | | 0 | | Note payable - Unsecured Loan | | | 7,485 | | | | 0 | | Note payable - IVG | | | 0 | | | | 4,240 | | Gross notes payable and long-term debt | | | 319,985 | | | | 322,740 | | Less deferred finance charges | | | (4,940 | ) | | | (6,466 | ) | Less debt discount | | | (25,083 | ) | | | (32,083 | ) | Less current maturities | | | (12,000 | ) | | | (15,240 | ) | Net notes payable and long-term debt | | $ | 277,962 | | | $ | 268,951 | |
20172018 Credit Facility
On February 17, 2017,March 7, 2018, the Company and NATC, entered into a new $250 million securedof credit facility comprisedfacilities consisting of (i) a $160 million 2018 First Lien Term Loan and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit FacilityFacility”), in each case, with Fifth Third Bank, as administrative agent, and other lenders, in addition to a $40 million 2018 Second Lien Term Loan (the “2017“2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) and (ii) a Second Lien Credit Facility with Prospect Capital Corporation, as administrative agent, and other lenders (the “2017 Second Lienlenders. The 2018 Credit Facility” and together with contains a $40 million accordion feature. Proceeds from the 2017 First Lien2018 Credit Facility the “2017 Credit Facility”). The Companywere used the proceeds of the 2017 Credit Facility to repay, in full, the Company’s First Lien Term Loan, Second Lien Term Loan, and Revolving2017 Credit Facility and to pay related fees and expenses. As a result of this transaction, theFacility. The Company incurred a loss on extinguishment of debt of $6.1$2.4 million duringin the first quarter of 2017.2018 as a result of the refinancing.
The 20172018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 20172018 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 20172018 Credit Facility, restrict the ability of the Company and its subsidiary guarantors: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments. Refer toSee Note 22 of Notes to Consolidated Financial Statements23, “ Dividends”, for further information regarding dividend restrictions.
20172018 First Lien Credit Facility
Facility:The 20172018 First Lien Credit Facility consists of: (i) a $50 million revolving credit facility (the “2017 Revolving Credit Facility”), (ii) a $110 million first out term loan facility (the “2017 First Out Term Loan”), and (iii) a $35 million second out term loan facility (the “2017 Second Out Term Loan”), which will be repaid in full only after repayment in full of the 2017 First Out Term Loan. The 2017 First Lien Credit Facility also includes an accordion feature allowing the Company to borrow up to an additional $40 million upon the satisfaction of certain conditions, including obtaining commitments from one or more lenders. Borrowings under the 2017 Revolving Credit Facility may be used for general corporate purposes, including acquisitions.
The 2017 First Out Term Loan and the 2017 Revolving Credit Facility have a maturity date of February 17, 2022, and the 2017 Second Out Term Loan has a maturity date of May 17, 2022. The 2017 First Out Term Loan and the 20172018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.5%2.75% to 3.5%3.50% based on the Company’s senior leverage ratio. The 20172018 First OutLien Term Loan has quarterly required payments of $1.4$2.0 million beginning June 30, 2017,2018, increasing to $2.1$3.0 million on June 30, 2019,2020, and increasing to $2.8$4.0 million on June 30, 2021.2022. The 2017 Second Out Term Loan bears interest at LIBOR plus 6% (subject to a floor of 1.00%). The 2017 Second Out Term Loan has quarterly required payments of $0.1 million beginning June 30, 2017. The 20172018 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.75x with step-downs to 3.00x, a maximum total leverage ratio of 4.75x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x. The weighted average interest rate at December 31, 2017, on the 2017 Revolving Credit Facility was 5.05%. The weighted average interest rate at December 31, 2017, on the 2017 First Out Term Loan was 4.61%. The weighted average interest rate at December 31, 2017, on the 2017 Second Out Term Loan was 7.61%.
2017 Second Lien Credit Facility
The 2017 Second Lien Credit Facility consists of a $55 million second lien term loan (the “2017 Second Lien Term Loan”) havinghas a maturity date of August 17, 2022.March 7, 2023. The 2017 Second Lien Term Loan bears interest at a fixed rate of 11%. The 2017 Second Lien Credit Facility contains certain financial covenants including a maximum senior leverage ratio of 4.25x with step-downs to 3.50x, a maximum total leverage ratio of 5.25x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x.
Note Payable – VaporBeast
On November 30, 2016, the Company issued a note payable to VaporBeast’s former shareholders (“VaporBeast Note”). The VaporBeast Note is $2.0 million principal with 6% interest compounded monthly and matures on May 30, 2018. The VaporBeast Note may be prepaid at any time without penalty and is subject to a late-payment penalty of 5% and a default rate of 13% per annum. The VaporBeast Note is subject to customary defaults, including defaults for nonpayment, nonperformance, any material breach under the purchase agreement, and bankruptcy or insolvency.
First Lien Term Loan
Turning Point Brands, Inc. (“TPBI”), along with NATC and its subsidiaries, were guarantors under the First Lien Term Loan. TPLLC and its sole subsidiary at the date of the agreement, Intrepid, were not guarantors of the First Lien Term Loan. The2018 First Lien Term Loan wasis secured by a first-priorityfirst priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of the Company’s capital stock, of NATC or any guarantor, other than certain excluded assets (the “Collateral”). In connection with the Convertible Senior Notes offering, the Company entered into a First Amendment (“the Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lender parties thereto. The loans designated as LIBOR loans bore interest atAmendment was entered into primarily to permit the LIBOR thenCompany to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in effect (but not less than 1.25%) plus 6.50%,connection with the issuance of such notes and to use the loans designated as base rate loans bore interest at (i)proceeds from the highestissuance of (A) the Prime Rate, (B)notes to repay amounts outstanding under the Federal Funds Rate plus 0.50%, (C) LIBORCompany’s Second Lien Credit Agreement and use the remaining proceeds for an interestacquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contains certain financial covenants, which were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants include maximum senior leverage ratio of 3.00x with step-downs to 2.50x, a maximum total leverage ratio of 5.50x with step-downs to 5.00x, and a minimum fixed charge coverage ratio of 1.20x. In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of one month plus 1.00%, and (D) 2.25% per year plus (ii) 5.50%.October 1, 2019 until September 30, 2020. In connection with the amendment, fees of $0.2 million were incurred. Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter 2019. All parties agreed to waive the payment, resulting in consent fees of $0.1 million. The weighted average interest rate of the 2018 First Lien Term Loan was paid2.9% at December 31, 2020. At December 31, 2020, the Company had 0 borrowings outstanding under the 2018 Revolving Credit Facility. The $50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by letters of credit from Fifth Third Bank totaling $3.6 million, resulting in full with proceeds from$46.4 million of availability under the 20172018 Revolving Credit Facility.Facility at December 31, 2020.
2018 Second Lien Term Loan
Credit Facility:The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00% and had a maturity date of March 7, 2024. The 2018 Second Lien Term Loan was secured by a second priority security interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan. Under theThe 2018 Second Lien Term Loan,Credit Facility contained certain financial covenants including a maximum senior leverage ratio of 3.75x with step-downs to 3.50x, a maximum total leverage ratio of 4.75x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x. Based on an excess cash covenant for the loans designated as LIBOR loans bore interest at LIBOR thenfacility, a $4.5 million principal payment was made in effect (but not less than 1.25%) plus 10.25%.the second quarter 2019, resulting in a $0.2 million loss on extinguishment of debt. The loans designated as base rate loans bore interest at (i)Company used a portion of the highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00%, and (D) 2.25% per year plus (ii) 9.25%. The Second Lien Term Loan was paid in full with proceeds from the 2017issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Credit Facility.Facility in the third quarter 2019. The principal paid in the third quarter amounted to $35.5 million, and the transaction resulted in a $1.1 million loss on extinguishment of debt.
Revolving Credit FacilityConvertible Senior Notes
In July 2019 the Company closed an offering of $172.5 million in aggregate principal amount of our 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations of the Company.
The Revolving Credit Facility provided for aggregate commitmentsConvertible Senior Notes are convertible into approximately 3,202,808 shares of upour voting common stock under certain circumstances prior to $40 millionmaturity at a conversion rate of 18.567 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of December 31, 2020.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing base, whichrate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as (i)a debt discount, represents the sumdifference between the proceeds from the issuance of 85% of eligible accounts receivable, plus (ii) the lesser of (A) the product of 70%Convertible Senior Notes and the value of eligible inventory or (B) the product of 85%, the net recovery percentage identified in the most recent inventory appraisal, and the value of eligible inventory, plus (iii) the lesser of (A) the product of 75% and the value of eligible inventory or (B) the product of 85%, the net recovery percentage identified in the most recent inventory appraisal, and thefair value of the eligible finished goods inventory, minus (iv)liability component of the aggregate amountConvertible Senior Notes. The excess of reserves established by the administrative agent. The outstanding balance on the Revolving Credit Facility was paid in full with proceeds from the 2017 Credit Facility.
PIK Toggle Notes
On January 13, 2014, the Company issued PIK Toggle Notes (“PIK Toggle Notes”) to a fund managed by Standard General, with a principal amount of $45the liability component over its carrying amount (“debt discount”), $35.0 million, and warrantswill be amortized to purchase 42,424interest expense using an effective interest rate of 7.5% over the expected life of the Company’s common stock at $.01 per share,Convertible Senior Notes. The equity component is not remeasured as adjustedlong as it continues to meet the criteria for stock splitsequity classification. Interest expense includes $7.0 and other events specified in the agreement. After adjustment$2.9 million of amortization for the stock split effected in connection with the IPO of 10.43174381 to 1, the warrants provideyears ended December 31, 2020 and 2019, respectively.
In accounting for the purchase of 442,558 of the Company’s common stock. Dueissuance costs related to the issuance of the warrantsConvertible Senior Notes, the PIK ToggleCompany allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes, had an original issue discount of $1.7$4.7 million and were initially valued at $43.3 million. The PIK Toggle Notes were scheduled to mature,, and the warrantsdebt issuance costs attributable to expire, on January 13, 2021.the equity component, $1.2 million, are netted with the equity component of stockholders’ equity (deficit).
The PIK Toggle Notes accrued interest based on LIBOR then in effect (but not less than 1.25%) plus 13.75%. Interest was payable on the last day of each quarter and upon maturity. The Company had the flexibility to pay interest in kind through an increase in the principal amount at the same interest rate as the PIK Toggle Notes. The Company chose to increase the PIK Toggle Notes for all interest for the first three months of 2016.
In connection with the IPO, in May 2016Convertible Senior Notes offering, the Company redeemedentered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.86 per and retired alla cap price of $82.86 per, and are exercisable when, and if, the outstanding PIK Toggle Notes in exchange for a combination of cash and shares of the Company’s voting common stock. As a result of this transaction, the Company incurred a loss on extinguishment of debt of $2.8 million during the second quarter of 2016. Standard General exercised the warrants in 2016.
7%Convertible Senior Notes are converted. The Company paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.
In January 2014,Promissory Note On June 10, 2020, in connection with the acquisition of certain Durfort assets, the Company issued 7% Senior Notes to various stockholders with athe Promissory Note in the principal amount of $11$10.0 million and warrants to purchase 11,000,000 units(the “Principal Amount”), with an annual interest rate of membership interests7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount is payable in Intrepid, which represented 40%2 $5.0 million installments, with the first installment due 18 months after the closing date of the Intrepid Common Units outstanding on a fully diluted basis, at a purchase priceacquisition (June 10, 2020), and the second installment due 36 months after the closing date of $1.00 per unit. Duethe acquisition. The second installment is subject to reduction for certain amounts payable to the issuance of the Intrepid warrants, the 7% Senior Notes had an original issue discount of $2.8 million and were initially valued at $8.2 million. The 7% Senior Notes were scheduled to mature, and the warrants to expire, on December 31, 2023.Company as a holdback. On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020, National Tobacco Company, L.P., a subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan. The 7% Senior Notesproceeds of the loan were received on April 27, 2020. The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.
Note Payable – IVG
In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note is $4.0 million principal with 6.0% interest compounding annually and matures on March 5, 2020. All principal and accrued and unpaid interest at a fixed rate of 7% per annum. The 7% Senior Notesunder the IVG Note were general unsecuredsubject to indemnification obligations of the Company and ranked equallysellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note was $4.2 million as of December 31, 2019. During 2020, the carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account pending agreement with the Company’s other unsecured and unsubordinated debt from time to time outstanding. Redemptionssellers of the 7% Senior Notes could be made by the Company at any time without penalty or premium. In connection with the IPO, in May 2016, the Company redeemed and retired all of the outstanding 7% Senior Notes in exchange for shares of the Company’s voting common stock.indemnification obligations.
Note 13.14. Income Taxes:Taxes
Income tax expense (benefit) for the years ended December 31 consists of the following components:
| | 2017 | | | 2016 | | | 2015 | | | 2020 | | | 2019 | | | 2018 | | | | Current | | | Deferred | | | Total | | | Current | | | Deferred | | | Total | | | Current | | | Deferred | | | Total | | | Current | | | Deferred | | | Total | | | Current | | | Deferred | | | Total | | | Current | | | Deferred | | | Total | | Federal | | $ | 329 | | | $ | 4,772 | | | $ | 5,101 | | | $ | (46 | ) | | $ | (12,655 | ) | | $ | (12,701 | ) | | $ | 321 | | | $ | 43 | | | $ | 364 | | | $ | 5,288 | | | $ | 2,200 | | | $ | 7,488 | | | $ | 5,281 | | | $ | (3,282 | ) | | $ | 1,999 | | | $ | 2,326 | | | $ | 3,165 | | | $ | 5,491 | | State and Local | | | 1,770 | | | | 409 | | | $ | 2,179 | | | | 760 | | | | (64 | ) | | | 696 | | | | 706 | | | | 8 | | | | 714 | | | | 1,927 | | | | 600 | | | | 2,527 | | | | 982 | | | | (937 | ) | | | 45 | | | | 1,394 | | | | (600 | ) | | | 794 | | | | $ | 2,099 | | | $ | 5,181 | | | $ | 7,280 | | | $ | 714 | | | $ | (12,719 | ) | | $ | (12,005 | ) | | $ | 1,027 | | | $ | 51 | | | $ | 1,078 | | | Total | | | $ | 7,215 | | | $ | 2,800 | | | $ | 10,015 | | | $ | 6,263 | | | $ | (4,219 | ) | | $ | 2,044 | | | $ | 3,720 | | | $ | 2,565 | | | $ | 6,285 | |
Deferred tax assets and liabilities at December 31 consistconsists of:
| | 2017 | | | 2016 | | | December 31, 2020 | | | December 31, 2019 | | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | Inventory | | $ | 2,485 | | | $ | 187 | | | $ | 2,268 | | | $ | 423 | | | $ | 4,151 | | | $ | 0 | | | $ | 7,705 | | | $ | 0 | | Property, plant, and equipment | | | - | | | | 1,134 | | | | - | | | | 1,642 | | | | 0 | | | | 3,107 | | | | 0 | | | | 2,076 | | Goodwill and other intangible assets | | | 14 | | | | 7,397 | | | | 43 | | | | 10,431 | | | | 0 | | | | 8,144 | | | | 0 | | | | 7,672 | | Accrued pension and postretirement costs | | | 621 | | | | - | | | | 1,964 | | | | - | | | Federal NOL carryforward | | | 3,736 | | | | - | | | | 11,911 | | | | - | | | Accrued pension and post-retirement costs | | | | 0 | | | | 0 | | | | 0 | | | | 943 | | State NOL carryforward | | | 3,071 | | | | - | | | | 3,083 | | | | - | | | | 2,236 | | | | - | | | | 3,225 | | | | - | | AMT credit carryforward | | | 1,327 | | | | - | | | | 997 | | | | - | | | Unrealized loss on investments | | | 320 | | | | - | | | | 582 | | | | - | | | | 876 | | | | - | | | | 580 | | | | - | | Deferred income for tax purposes | | | - | | | | 486 | | | | - | | | | 1,419 | | | Leases | | | | 4,920 | | | | 4,557 | | | | 3,393 | | | | 3,099 | | Original issue discount | | | | 3,800 | | | | 6,276 | | | | 4,806 | | | | 8,118 | | Other | | | 1,441 | | | | 290 | | | | 2,867 | | | | 429 | | | | 6,611 | | | | 2,356 | | | | 4,407 | | | | 555 | | | | | 13,015 | | | | 9,494 | | | | 23,715 | | | | 14,344 | | | Gross deferred income taxes | | | | 22,594 | | | | 24,440 | | | | 24,116 | | | | 22,463 | | Valuation allowance | | | (3,071 | ) | | | | | | | (3,083 | ) | | | | | | | (2,236 | ) | | | - | | | | (3,225 | ) | | | - | | Deferred income taxes | | $ | 9,944 | | | $ | 9,494 | | | $ | 20,632 | | | $ | 14,344 | | | Net deferred income taxes | | | $ | 20,358 | | | $ | 24,440 | | | $ | 20,891 | | | $ | 22,463 | |
At December 31, 2017, the Company had federal net operating loss (“NOL”) carryforwards for income tax purposes of approximately $17.8 million, which expire in 2034. At December 31, 2017,2020, the Company had state NOL carryforwards for income tax purposes of approximately $63.1$52.9 million, which expire between 20182025 and 2036.2040, $21.2 million of which has an indefinite carryforward period. The Company has determined that, at December 31, 20172020 and 2016,2020, its ability to realize future benefits of its state NOL carryforwards does not meet the “more likely than not” criteria in ASC 740, Income Taxes. Therefore, a valuation allowance of $3.1$2.2 million and $3.2 million has been recorded in each year,at December 2020 and 2019, respectively.
ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that they did not0t have any uncertain tax positions requiring recognition as a result of the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of interest expense. For the years ended December 31, 2017, 2016,2020, 2019, and 2015, no2018, 0 estimated interest or penalties were recognized for the uncertainty of tax positions taken. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2014.2017.
Reconciliation of the federal statutory rate and the effective income tax rate for the years ended December 31 is as follows:
| | 2017 | | | 2016 | | | 2015 | | | 2020 | | | 2019 | | | 2018 | | Federal statutory rate | | | 35 | % | | | 35 | % | | | 35 | % | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | State taxes | | | 8.1 | | | | 4.7 | | | | 7.0 | | | | 2.7 | % | | | 0.0 | % | | | 3.3 | % | Permanent differences | | | -16.1 | | | | 13.2 | | | | 42.5 | | | | -1.8 | % | | | -6.7 | % | | | -2.9 | % | Other | | | | 5.1 | % | | | -3.8 | % | | | -0.8 | % | Valuation allowance | | | - | | | | -133.4 | | | | -74.0 | | | | -3.7 | % | | | 2.4 | % | | | -0.7 | % | Effective income tax rate | | | 27.0 | % | | | -80.5 | % | | | 10.5 | % | | | 23.3 | % | | | 12.9 | % | | | 19.9 | % |
In December 2017, the U.S. Congress passed the TCJA which reduced the corporate income tax rate to 21%, effective January 1, 2018. Other significant changes accompanying the corporate income tax rate reduction include eliminating the corporate alternative minimum tax, limiting the interest expense deduction to 30% of adjusted taxable income, and limiting net operating losses to 80% of taxable income for losses arising in tax years beginning after 2017. As a result of the TCJA, the Company was required to remeasure its deferred tax assets and liabilities at the newly enacted rate, resulting in $0.2 million of income tax expense for the year ended December 31, 2017. The permanent differences for the year ended December 31, 2017,2020, 2019, and 2018 are primarily related to income tax benefits of $4.2$3.3 million ($0.7 million tax effected), $4.6 million ($1.0 million tax effected), and $5.4 million ($1.1 million tax effected), respectively, as a result of stock option exercises.
Note 14.15. Pension and Postretirement Benefit Plans:Plans
The Company hashad a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation. The defined benefit pension plan iswas frozen. The Company’s policy iswas to make the minimum amount of contributions that can be deducted for federal income taxes. The Company expects to make nomade 0 contributions to the pension plan in 2020. In the year endingsecond quarter of 2018, the Company made mutually agreed upon lump-sum payments to certain individuals covered by the defined benefit pension plan which resulted in a curtailment loss of approximately $0.3 million during the second quarter of 2018, which is reported within “Net periodic benefit (income), excluding service cost” within the Consolidated Statements of Income. In the fourth quarter 2019, the Company elected to terminate the defined benefit pension plan, effective December 31, 2018.2019 with final distributions made in the third quarter of 2020. The Company sponsored a defined benefit postretirement plan that covered hourly employees. This plan providesprovided medical and dental benefits. This plan iswas contributory with retiree contributions adjusted annually. The Company’s policy iswas to make contributions equal to benefits paid during the year. In the fourth quarter 2019, the Company amended the plan to cease benefits effective June 30, 2020. The Company expectsplan amendment eliminated a significant amount of the benefits under the plan, resulting in a curtailment of $3.2 million. The curtailment resulted in $1.8 million being reclassified from other comprehensive income to contribute approximately $0.3income. The total gain on the curtailment was $4.9 million to its postretirement planand is recorded in 2018 forNet periodic benefit (income), excluding service cost in the paymentincome statement.
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for the years ended December 31, 20172020 and 2016,2019, and a statement of the funded status:
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | Reconciliation of benefit obligations: | | | | | | | | | | | | | | | | | | | | | | | | | Benefit obligation at January 1 | | $ | 16,780 | | | $ | 16,994 | | | $ | 4,745 | | | $ | 5,003 | | | $ | 14,217 | | | $ | 13,700 | | | $ | 115 | | | $ | 3,305 | | Service cost | | | 104 | | | | 104 | | | | - | | | | - | | | | 0 | | | | 104 | | | | 0 | | | | 0 | | Interest cost | | | 649 | | | | 699 | | | | 144 | | | | 173 | | | | 190 | | | | 520 | | | | 0 | | | | 101 | | Actuarial loss (gain) | | | 668 | | | | 86 | | | | (472 | ) | | | (111 | ) | | | 249 | | | | 916 | | | | (83 | ) | | | 0 | | Assumptions | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Settlement/curtailment | | | | (1,869 | ) | | | 0 | | | | 0 | | | | (3,207 | ) | Annuities purchased | | | | (12,116 | ) | | | 0 | | | | 0 | | | | 0 | | Benefits paid | | | (1,080 | ) | | | (1,103 | ) | | | (200 | ) | | | (320 | ) | | | (671 | ) | | | (1,023 | ) | | | (32 | ) | | | (84 | ) | Benefit obligation at December 31 | | $ | 17,121 | | | $ | 16,780 | | | $ | 4,217 | | | $ | 4,745 | | | $ | 0 | | | $ | 14,217 | | | $ | 0 | | | $ | 115 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation of fair value of plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets at January 1 | | $ | 16,357 | | | $ | 16,507 | | | $ | - | | | $ | - | | | $ | 15,903 | | | $ | 14,923 | | | $ | 0 | | | $ | 0 | | Actual return on plan assets | | | 2,240 | | | | 953 | | | | - | | | | - | | | | 1,139 | | | | 2,003 | | | | 0 | | | | 0 | | Employer contributions | | | - | | | | - | | | | 200 | | | | 320 | | | | 0 | | | | 0 | | | | 32 | | | | 84 | | Settlement/curtailment | | | | (1,869 | ) | | | 0 | | | | 0 | | | | 0 | | Annuities purchased | | | | (12,116 | ) | | | 0 | | | | 0 | | | | 0 | | Benefits paid | | | (1,080 | ) | | | (1,103 | ) | | | (200 | ) | | | (320 | ) | | | (671 | ) | | | (1,023 | ) | | | (32 | ) | | | (84 | ) | Asset reversion upon termination | | | | (2,386 | ) | | | 0 | | | | 0 | | | | 0 | | Fair value of plan assets at December 31 | | $ | 17,517 | | | $ | 16,357 | | | $ | - | | | $ | - | | | $ | 0 | | | $ | 15,903 | | | $ | 0 | | | $ | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funded status: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funded status at December 31 | | $ | 396 | | | $ | (423 | ) | | $ | (4,217 | ) | | $ | (4,745 | ) | | $ | 0 | | | $ | 1,686 | | | $ | 0 | | | $ | (115 | ) | Unrecognized net actuarial loss (gain) | | | 3,443 | | | | 4,454 | | | | (1,161 | ) | | | (741 | ) | | | 0 | | | | 1,827 | | | | 0 | | | | (54 | ) | Net amount recognized | | $ | 3,839 | | | $ | 4,031 | | | $ | (5,378 | ) | | $ | (5,486 | ) | | $ | 0 | | | $ | 3,513 | | | $ | 0 | | | $ | (169 | ) |
The following schedule shows the pension plan in which accumulated benefit obligations exceed plan assets at December 31, 2016. Accumulated benefit obligations did not exceed plan assets at December 31, 2017.2019, for the Company’s pension plan.
| | 2016 | | Projected benefit obligation | | $ | 16,780 | | Accumulated benefit obligation | | | 16,780 | | Fair value of plan assets | | | 16,357 | |
The asset allocation for the Company’s defined benefit plan, by asset category, follows:
| | Target Allocation | | | Percentage of Plan Assets at December 31, | | | | 2018 | | | 2017 | | | 2016 | | Asset category: | | | | | | | | | | Equity securities(1) | | | 60.0 | % | | | 51.4 | % | | | 62.0 | % | Debt securities | | | 40.0 | % | | | 21.6 | % | | | 26.0 | % | Cash | | | 0.0 | % | | | 27.0 | % | | | 12.0 | % | Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | (1)Percentage of
Plan Assets at December 31, | No shares of the Company's common stock were included in equity
| | | 2019 | | Asset category: | | | | Debt securities at December 31, 2017 or 2016 | | | 88.5 | % | Cash | | | 11.5 | % | Total | | | 100.0 | % |
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is the description of the valuation methodologies used for assets measured at fair value subsequent to initial recognition. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used at December 31, 2017 and 2016.2019.
| ·• | Pooled Separate Accounts.Valued at the net asset value (NAV) of shares held by the plan at year end. |
| ·• | Guaranteed Deposit Account. Valued at contract value, which approximates fair value. |
| ·• | Assets measured at fair value on a recurring basis.The table below presents the balances of the plan’s assets measured at fair value on a recurring basis by level within the fair value hierarchy: |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | | Pooled separate accounts | | $ | 14,079 | | | $ | 0 | | | $ | 14,079 | | | $ | 0 | | Guaranteed deposit account | | | 1,824 | | | | 0 | | | | 0 | | | | 1,824 | | Total assets at fair value as of December 31, 2019 | | $ | 15,903 | | | $ | 0 | | | $ | 14,079 | | | $ | 1,824 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | | Pooled separate accounts | | $ | 12,796 | | | $ | - | | | $ | 12,796 | | | $ | - | | Guaranteed deposit account | | | 4,721 | | | | - | | | | - | | | | 4,721 | | Total assets at fair value as of December 31, 2017 | | $ | 17,517 | | | $ | - | | | $ | 12,796 | | | $ | 4,721 | | | | | | | | | | | | | | | | | | | Pooled separate accounts | | $ | 14,391 | | | $ | - | | | $ | 14,391 | | | $ | - | | Guaranteed deposit account | | | 1,966 | | | | - | | | | - | | | | 1,966 | | Total assets at fair value as of December 31, 2016 | | $ | 16,357 | | | $ | - | | | $ | 14,391 | | | $ | 1,966 | |
The table below sets forth a summary of the changes in the fair value of the Guaranteed Deposit Account:
| | Guaranteed Deposit Account | | | Guaranteed Deposit Account | | Balance at December 31, 2015 | | $ | 1,732 | | | Balance at January 1, 2019 | | | $ | 2,265 | | Total gains (losses), realized/unrealized | | | | | | | | | Return on plan assets | | | 60 | | | | 45 | | Purchases, sales, and settlements, net | | | 174 | | | | (486 | ) | Balance at December 31, 2016 | | | 1,966 | | | Balance at December 31, 2019 | | | $ | 1,824 | | | | | | | | Total gains (losses), realized/unrealized | | | | | | | | | Return on plan assets | | | 64 | | | $ | 32 | | Purchases, sales, and settlements, net | | | 2,691 | | | | (1,856 | ) | Balance at December 31, 2017 | | $ | 4,721 | | | Balance at December 31, 2020 | | | $ | 0 | |
The Company’s investment philosophy iswas to earn a reasonable return without subjecting plan assets to undue risk. The Company usesused one management firm to manage plan assets, which arewere invested in equity and debt securities. The Company’s investment objective iswas to provide long-term growthmatch the duration of capital as well as current income.the debt securities with the expected payments. The following table provides the amounts recognized in the consolidated balance sheets as of December 31:
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | Prepaid asset | | $ | 396 | | | $ | - | | | $ | - | | | $ | - | | | $ | 0 | | | $ | 1,686 | | | $ | 0 | | | $ | 0 | | Accrued benefit cost | | | - | | | | (423 | ) | | | (4,217 | ) | | | (4,745 | ) | | | 0 | | | | 0 | | | | 0 | | | | (115 | ) | Accumulated other comprehensive loss, unrecognized net gain (loss) | | | 3,443 | | | | 4,454 | | | | (1,161 | ) | | | (741 | ) | | | 0 | | | | 1,827 | | | | 0 | | | | (54 | ) | | | $ | 3,839 | | | $ | 4,031 | | | $ | (5,378 | ) | | $ | (5,486 | ) | | Total | | | $ | 0 | | | $ | 3,513 | | | $ | 0 | | | $ | (169 | ) |
TheNaN amounts in accumulated other comprehensive income that are expected towill be recognized in net periodic benefit costs from accumulated other comprehensive income in 2018 are gains2021 for the pension or post retirement plan as both plans have been terminated.
The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans for the years ended December 31:
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2018 | | Service cost | | $ | 104 | | | $ | 104 | | | $ | - | | | $ | - | | | $ | 0 | | | $ | 104 | | | $ | 104 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Interest cost | | | 649 | | | | 699 | | | | 144 | | | | 173 | | | | 190 | | | | 520 | | | | 553 | | | | 0 | | | | 101 | | | | 117 | | Expected return on plan assets | | | (1,024 | ) | | | (1,034 | ) | | | - | | | | - | | | | (322 | ) | | | (645 | ) | | | (949 | ) | | | 0 | | | | 0 | | | | 0 | | Amortization of (gains) losses | | | 463 | | | | 493 | | | | (52 | ) | | | (24 | ) | | | 72 | | | | 147 | | | | 186 | | | | (131 | ) | | | (169 | ) | | | (81 | ) | Net periodic benefit cost (income) | | $ | 192 | | | $ | 262 | | | $ | 92 | | | $ | 149 | | | Settlement and Curtailment loss (gain) | | | | 1,180 | | | | 0 | | | | 306 | | | | 0 | | | | (4,915 | ) | | | 0 | | Net periodic benefit cost | | | $ | 1,120 | | | $ | 126 | | | $ | 200 | | | $ | (131 | ) | | $ | (4,983 | ) | | $ | 36 | |
The Company iswas required to make assumptions regarding such variables as the expected long-term rate of return on plan assets and the discount rate applied to determine service cost and interest cost. The rate of return on assets used iswas determined based upon analysis of the plans’ historical performance relative to the overall markets and mix of assets. The assumptions listed below represent management’s review of relevant market conditions and have been adjusted as appropriate. A discount rate was not used for pension benefits in 2020 as all benefits were distributed during the year. A discount rate was not used for postretirement benefits in 2019 as all benefits were to be paid in less than one year. The Company used a discount rate of 3.0% as the weighted average assumptions usedassumption in the measurement of the Company’sits benefit obligation arein 2019. The Company used a discount of 4.0% and an expected rate of return on plan assets of 4.5% as follows:
| | Pension Benefits | | | Postretirement Benefits | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Discount rate | | | 3.50 | % | | | 4.00 | % | | | 3.25 | % | | | 3.50 | % |
Thethe weighted average assumptions used to determine net periodic pension and postretirement costs are as follows:in 2019.
| | Pension Benefits | | | Postretirement Benefits | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Discount rate | | | 4.0 | % | | | 4.3 | % | | | 3.5 | % | | | 3.8 | % | Expected return on plan assets | | | 6.5 | % | | | 6.5 | % | | | - | | | | - | |
For measurement purposes of the postretirement benefits, the assumed health care cost trend rate for participants as of December 31, 2017, was 6.0% reducing to 5.5% by 2018. Assumed health care cost trend rates could have a significant effect on the amounts reported for the postretirement benefit plans. A 1% increase in assumed health care cost trend rates would have the following effects:
| | 2017 | | | 2016 | | | 2015 | | Effect on total of service and interest cost components of net periodic postretirement cost | | $ | 4 | | | $ | 3 | | | $ | 4 | | Effect on the health care component of the accumulated postretirement benefit obligation | | $ | 109 | | | $ | 78 | | | $ | 101 | |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Period | | Pension Benefits | | | Postretirement Benefits | | 2018 | | $ | 1,107 | | | $ | 259 | | 2019 | | | 1,096 | | | | 264 | | 2020 | | | 1,093 | | | | 269 | | 2021 | | | 1,106 | | | | 274 | | 2022 | | | 1,109 | | | | 279 | | 2023-2027 | | $ | 5,347 | | | $ | 1,422 | |
The Company also sponsors a voluntary 401(k) retirement savings plan. Eligible employees may elect to contribute up to 15% of their annual earnings subject to certain limitations. For the 20172020 and 20162019 Plan Years, the Company contributed 4% to those employees contributing 4% or greater. For those employees contributing less than 4%, the Company matched the contribution by 100%. Additionally, for all years presented, the Company made discretionary contributions of 1% to all employees, regardless of an employee’s contribution level. Company contributions to this plan were approximately $0.9$1.6 million for 2017, $0.82020, $1.5 million for 2016,2019, and $0.7$1.2 million for 2015.2018.
Note 15.16. Lease Commitments:Commitments
As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The main impact to the financial statements was the recognition of lease liabilities and right of use assets. The Company’s leases consist primarily of leased property for manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, the Company does not recognize any renewal periods within the lease terms as there are not significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
The components of lease expense consists of the following:
| | For the year ended December 31, | | | | 2020 | | | 2019 | | Operating lease cost | | | | | | | Cost of sales | | $ | 908 | | | $ | 874 | | Selling, general and administrative | | | 2,402 | | | | 2,973 | | Variable lease cost (1) | | | 587 | | | | 463 | | Short-term lease cost | | | 131 | | | | 147 | | Sublease income | | | (120 | ) | | | (110 | ) | Total | | $ | 3,908 | | | $ | 4,347 | |
(1) | Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying. |
| | December 31, 2020 | | | December 31, 2019 | | Assets: | | | | | | | Right of use assets | | $ | 17,918 | | | $ | 12,130 | | Total lease assets | | $ | 17,918 | | | $ | 12,130 | | | | | | | | | | | Liabilities: | | | | | | | | | Current lease liabilities (2) | | $ | 3,228 | | | $ | 2,218 | | Long-term lease liabilities | | | 16,117 | | | | 11,067 | | Total lease liabilities | | $ | 19,345 | | | $ | 13,285 | |
(2) | Reported within accrued liabilities on the balance sheet |
| | As of December 31, | | | | 2020 | | | 2019 | | Weighted-average remaining lease term - operating leases | | 7.2 years | | | 8.1 years | | Weighted-average discount rate - operating leases | | | 4.93 | % | | | 6.07 | % |
Nearly all the lease contracts for the Company leases certain office space and vehicles for varying periods.do not provide a readily determinable implicit rate. For these contracts, the Company estimated the incremental borrowing rate based on information available upon adoption of ASU 2016-02. The acquisitionCompany applied a consistent method in periods after the adoption of Vapor Shark, completed on June 30, 2017, added seven operating leases for retail store space. The following schedule details future minimumASU 2016-02 to estimate the incremental borrowing rate.
Maturities of lease liabilities consisted of the following:
| | December 31, 2020 | | 2021 | | $ | 4,021 | | 2022 | | | 3,731 | | 2023 | | | 3,462 | | 2024 | | | 2,417 | | 2025 | | | 2,056 | | Years thereafter | | | 7,428 | | Total lease payments | | $ | 23,115 | | Less: Imputed interest | | | 3,770 | | Present value of lease liabilities | | $ | 19,345 | |
Minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year asconsisted of the following:
Year | | Payments | | 2021 | | $ | 2,909 | | 2022 | | | 2,653 | | 2023 | | | 2,417 | | 2024 | | | 2,374 | | 2025 | | | 2,056 | | Years thereafter | | | 7,428 | | Total | | $ | 19,837 | |
At December 31, 2017:2019, the Company had operating leases with lease liabilities of $1.5 million which had not yet commenced. The leases are primarily related to vehicles for business use. The Company recognized $0.1 and $0.3 million in impairments of right of use assets in 2020 and 2019, respectively, related to store closures.
Year | | Payments | | 2018 | | | 1,713 | | 2019 | | | 963 | | 2020 | | | 786 | | Total | | $ | 3,462 | |
The total lease expense included in the consolidated statements of income for the years ended December 31, 2017, 2016, and 2015, was $2.6 million, $1.8 million, and $1.8 million, respectively.
Note 16.17. Share Incentive Plans:Plans
On April 28, 2016, the Board of Directors of the Company adopted the Turning Point Brands, Inc., 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of the Company’s voting common stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan is scheduled to terminate on April 27, 2026. The 2015 Plan is administrated by a committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the awards, with such criteria to be specified in the award agreement. As of December 31, 2017, 21,1032020, 16,159 shares of restricted stock, 94,000459,411 performance-based restricted stock units, and 187,015608,728 options have been granted to employees of the Company under the 2015 Plan.Plan, net of forfeitures. There are 1,097,882315,702 shares available for grant under the 2015 Plan.
On February 7, 2017, the Board of Directors of the Company approved stock option cash-out agreements with three Company officers and a director for the surrender of 83,400 expiring stock options in exchange for payment to the option holders of $11.99 per share. This payment equaled the difference between the exercise price of $1.06 and closing stock price of $13.05 on the approval date, or an aggregate of $1.0 million.
On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no0 additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. There are no0 shares available for grant under the 2006 Plan. Stock option activity for the 2006 and 2015 Plans is summarized below:
| | Stock Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Grant Date Fair Value | | | Stock Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Grant Date Fair Value | | Outstanding, December 31, 2015 | | | 1,667,671 | | | $ | 2.19 | | | $ | 1.20 | | | | | | | | | | | | | | | | | Outstanding, December 31, 2018 | | | | 659,574 | | | $ | 9.00 | | | $ | 3.34 | | Granted | | | 53,996 | | | | 9.26 | | | | 2.37 | | | | 180,780 | | | | 43.89 | | | | 14.34 | | Exercised | | | (73,135 | ) | | | 2.31 | | | | 1.27 | | | | (129,067 | ) | | | 5.72 | | | | 2.58 | | Forfeited | | | (10,770 | ) | | | 3.83 | | | | 2.17 | | | | (14,571 | ) | | | 34.55 | | | | 11.10 | | | | | | | | | | | | | | | | Outstanding, December 31, 2016 | | | 1,637,762 | | | | 2.41 | | | | 1.23 | | | | | | | | | | | | | | | | | Outstanding, December 31, 2019 | | | | 696,716 | | | | 18.13 | | | | 6.17 | | Granted | | | 133,819 | | | | 14.69 | | | | 4.41 | | | | 155,000 | | | | 14.85 | | | | 4.41 | | Exercised | | | (923,708 | ) | | | 1.55 | | | | 0.83 | | | | (135,146 | ) | | | 6.37 | | | | 2.74 | | Forfeited | | | (801 | ) | | | 15.37 | | | | 4.59 | | | | (5,510 | ) | | | 27.25 | | | | 8.64 | | Surrendered | | | (83,400 | ) | | | 1.06 | | | | 0.54 | | | | | | | | | | | | | | | | | Outstanding, December 31, 2017 | | | 763,672 | | | $ | 5.73 | | | $ | 2.36 | | | Outstanding, December 31, 2020 | | | | 711,060 | | | $ | 19.58 | | | $ | 6.42 | |
Under the 2006 Plan, the total intrinsic value of options exercised during the years ended December 31, 2017, 2016,2020, 2019, and 20152018, was $11.9$3.7 million, $0.5$5.0 million, and less than $0.1$5.7 million, respectively. The total intrinsic value
At December 31, 2017,2020, under the 2006 Plan, the outstanding stock options’ exercise price for 102,536 options is $1.06 per share, all of which are exercisable. The outstanding stock options’ exercise price for 474,121200,767 options is $3.83 per share, all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options is approximately 0.92 years for the options with the $1.06 exercise price and 5.342.9 years for the options with the $3.83 exercise price. The Company estimates the expected life of these stock options is ten years from the date of grant. For the $1.06 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of $1.06, a risk-free interest rate of 4.37%, a volatility of 30%, and no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $0.54 per share option granted. For the $3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of $3.83, a risk-free interest rate of 3.57%, a volatility of 40%, and no0 assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.
At December 31, 2017,2020, under the 2015 Plan, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the “simplified method” to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.
The following table outlines the assumptions based on the number of options granted under the 2015 Plan.
| | August 2016 Grant | | | February 2017 Grant | | | May 2017 Grant | | | February 10, 2017 | | | May 17, 2017 | | | March 7, 2018 | | | March 13, 2018 | | | March 20, 2019 | | | October 24, 2019 | | | March 18, 2020 | | Number of options granted | | | 53,996 | | | | 40,000 | | | | 93,819 | | | | 40,000 | | | | 93,819 | | | | 98,100 | | | | 26,000 | | | | 155,780 | | | | 25,000 | | | | 155,000 | | Options outstanding at December 31, 2017 | | | 53,996 | | | | 40,000 | | | | 93,019 | | | Number exercisable at December 31, 2017 | | | 40,497 | | | | - | | | | - | | | Options outstanding at December 31, 2020 | | | | 27,050 | | | | 55,880 | | | | 78,132 | | | | 26,000 | | | | 145,831 | | | | 25,000 | | | | 152,400 | | Number exercisable at December 31, 2020 | | | | 27,050 | | | | 55,880 | | | | 50,050 | | | | 26,000 | | | | 49,617 | | | | 8,250 | | | | 0 | | Exercise price | | $ | 9.26 | | | $ | 13.00 | | | $ | 15.41 | | | $ | 13.00 | | | $ | 15.41 | | | $ | 21.21 | | | $ | 21.49 | | | $ | 47.58 | | | $ | 20.89 | | | $ | 14.85 | | Remaining lives | | | 8.58 | | | | 9.17 | | | | 9.42 | | | | 6.12 | | | | 6.38 | | | | 7.19 | | | | 7.20 | | | | 8.22 | | | | 8.82 | | | | 9.22 | | Risk free interest rate | | | 1.16 | % | | | 1.89 | % | | | 1.76 | % | | | 1.89 | % | | | 1.76 | % | | | 2.65 | % | | | 2.62 | % | | | 2.34 | % | | | 1.58 | % | | | 0.79 | % | Expected volatility | | | 25.40 | % | | | 27.44 | % | | | 26.92 | % | | | 27.44 | % | | | 26.92 | % | | | 28.76 | % | | | 28.76 | % | | | 30.95 | % | | | 31.93 | % | | | 35.72 | % | Expected life | | | 5.375 | | | | 6.000 | | | | 6.000 | | | | 6.000 | | | | 6.000 | | | | 6.000 | | | | 5.495 | | | | 6.000 | | | | 6.000 | | | | 6.000 | | Dividend yield | | | - | | | | - | | | | - | | | | 0 | | | | 0 | | | | 0.83 | % | | | 0.82 | % | | | 0.42 | % | | | 0.95 | % | | | 1.49 | % | Fair value at grant date | | $ | 2.37 | | | $ | 3.98 | | | $ | 4.60 | | | $ | 3.98 | | | $ | 4.60 | | | $ | 6.37 | | | $ | 6.18 | | | $ | 15.63 | | | $ | 6.27 | | | $ | 4.41 | |
The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.4$1.2 million, $1.7 million and $0.1$0.7 million for the years ended December 31, 20172020, 2019 and 2016,2018, respectively. Total unrecognized compensation expense related to options at December 31, 2017,2020, is $0.3$0.6 million, which will be expensed over 2.01.48 years. Performance-based restricted stock units (“PRSUs”) are restricted stock units subject to both performance-based and service-based vesting conditions. The number of shares of common stock a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period. PRSUs will vest on the measurement date, which is no more than 65 days after the performance period, provided the applicable service and performance conditions are satisfied. On MarchAt December 31, 2017, the Committee granted 94,0002020, there are 459,411 PRSUs to employees of the Company,outstanding, all of which are unvested at December 31, 2017. The fair value of each PRSU is $15.60, the closing price of the stock on March 31, 2017, the date of grant. unvested.
| | March 31, 2017 | | | March 7, 2018 | | | March 20, 2019 | | | March 20, 2019 | | | July 19, 2019 | | | March 18, 2020 | | | December 28, 2020 | | Number of PRSUs granted | | | 94,000 | | | | 96,000 | | | | 92,500 | | | | 4,901 | | | | 88,582 | | | | 94,000 | | | | 88,169 | | PRSUs outstanding at December 31, 2020 | | | 79,500 | | | | 93,000 | | | | 84,550 | | | | 0 | | | | 21,342 | | | | 92,850 | | | | 88,169 | | Fair value as of grant date | | $ | 15.60 | | | $ | 21.21 | | | $ | 47.58 | | | $ | 47.58 | | | $ | 52.15 | | | $ | 14.85 | | | $ | 46.42 | | Remaining lives | | | 1.00 | | | | 2.00 | | | | 3.00 | | | | - | | | | 2.00 | | | | 4.00 | | | | 3.00 | |
The Company recorded compensation expense related to the PRSUs of approximately $0.2$1.4 million, $1.9 million and $0.6 million in the consolidated statements of income for the years ended December 31, 2017,2020, 2019 and 2018, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at December 31, 2017,2020, is $1.2$8.6 million, which will be expensed over the service period based on the probability of achieving the performance condition.
Note 17. Unit Incentive Plans18. Contingencies
On October 9, 2020, a purported stockholder of Turning Point Brands, Inc., Paul-Emile Berteau, filed a complaint in the Delaware Court of Chancery relating to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub (the “SDI Merger”). The complaint asserts 2 derivative counts purportedly on behalf of TPB for Intrepidbreaches of fiduciary duty against the Board of Directors of Turning Point Brands, LLC:
Effective August 7, 2014,Inc. and other parties. The third count asserts a direct claim against the Company adopted the Intrepid Brands, LLC 2014 Option Plan (“2014 Plan”) for unitsand its Board of ownership in Intrepid. The purposeDirectors seeking a declaration that TPB’s Bylaws are inconsistent with TPB’s certificate of the 2014 Plan was to promote the success and enhance the value ofincorporation. While the Company by linkingbelieves it has good and valid defenses to the personal interests of the service providers (including employees, consultants, and managers) to those of Company equity holders and by providing such individuals with an incentive for outstanding performance to generate superior returns to Company equity holders.
In connection with the IPO, in May of 2016 all options outstanding under the 2014 Plan were repurchased for aggregate cash consideration of $0.7 million, which included payroll taxes (see Note 3). With the repurchase of the options, the 2014 Plan was terminated.
In January 2014,claims, there can be no assurance that the Company issued warrants to purchase 11,000,000 unitswill prevail in this case, and it could have a material adverse effect on the Company’s business and results of membership interests in Intrepid (the “Intrepid Warrants”) concurrent with the 7% Senior Notes (see Note 12). This represented 40% of the Intrepid Common Units outstanding on a fully diluted basis, at a purchase price of $1.00 per unit. The warrants were exercisable beginning January 21, 2014 and were scheduled to expire on December 31, 2023.operations.
In connection with the IPO, in May of 2016 all outstanding Intrepid Warrants were repurchased for aggregate cash consideration of approximately $5.5 million (see Note 3).
Note 18. Contingencies:
Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and could have a material adverse effect on our business and results of operations. The Company is a defendant in certain cases which have been dormant for many years. Plaintiffs’ counsel are in the process of voluntarily dismissing those claims.
The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or consumption of e-liquids and may be subject to claims in the future relating to our other NewGen products. The Company is still evaluating these claims and the potential defenses to them. For example, the Company did not design or manufacture the products at issue; rather, the Company waswe were merely the distributor. Nonetheless, there can be no assurance that the Companywe will prevail in these cases, and they could have a material adverse effect on theour financial position, results of operations or cash flowsflows.
We have 2 franchisor subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from time to time responding parties to arbitration demands brought by franchisees. One of our subsidiaries, which we acquired in 2018, is the franchisor of the Company.VaporFi system. This subsidiary is a responding party in an arbitration brought by a franchisee claiming, among other things, violations of Federal Trade Commission Rules and Florida law. These allegations relate to the franchise disclosure document (FDD) utilized by the franchise system, a small vapor store chain, prior to our acquisition in 2018. We believe that we have good and valid substantive defenses against these claims and will vigorously defend ourselves in the arbitration.
We have also been named in a lawsuit brought by a different franchisee represented by the same firm that represents the plaintiff in the action described above. This case relates to the termination of the franchise agreement by the franchisor for failure to pay franchising fees and our subsequent demand that the franchisee cease using our marks and de-image locations formerly housing the franchises. The franchisee filed suit against us in the U.S. District Court for the Southern District of Florida sixteen months after our demand. The franchisee is claiming tortious interference and conversion. We believe that the suit was improperly brought before the U.S. District Court for the South District of Florida because the related franchising agreements included a mandatory arbitrary clause. We also believe we have valid substantive defenses against the claims and intend on vigorously defending our interests in this matter.
We have several subsidiaries engaged in making, distributing and retailing (online and in bricks-and-mortar) vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. We expect that our subsidiaries will be subject to some such cases and investigative requests. In the acquisition of the vapor businesses, we negotiated financial “hold-backs”, which we expect to be able to use to defray expenses associated with the information production and the cost of defending any such lawsuits. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal defenses against claims that they unfairly marketed vapor products.
74Note 19. Legal Settlement
The company engaged in discussions and mediation with VMR Products LLC (“VMR”), which was acquired in 2018. Pursuant to a Distribution and Supply agreement (“VMR Agreement”), VMR was providing the Company with V2 e-cigarettes for the exclusive distribution in bricks-and-mortar stores in the United States. Under the terms of the VMR Agreement, in the event of termination following a change in control, the acquirer was required to make a payment to the Company under a formula designed to provide the Company with a fair share of the value created by the Company’s performance under the VMR Agreement. The discussions have been completed and the Company received $6.7 million in the second quarter 2019 to settle the issue. Net of legal costs and reserves for anticipated future returns associated with the discontinuance, the Company recorded a $5.5 million gain in the second quarter of 2019, which was recorded as a reduction to selling, general, and administrative expenses.
Note 19.20. Income Per Share:Share
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2020 | | | December 31, 2019 | | | December 31, 2018 | | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | | Income | | | Shares | | | Per Share | | Net income attributable to Turning Point Brands, Inc. | | $ | 20,209 | | | | | | | | | $ | 26,913 | | | | | | | | | $ | 9,149 | | | | | | | | | Consolidated net income | | | $ | 33,041 | | | | | | | | | $ | 13,774 | | | | | | | | | $ | 25,289 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic EPS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average | | | | | | | 18,989,177 | | | $ | 1.06 | | | | | | | | 16,470,352 | | | $ | 1.63 | | | | | | | | 7,198,081 | | | $ | 1.27 | | | | | | | | 19,398,474 | | | $ | 1.70 | | | | | | | | 19,627,093 | | | $ | 0.70 | | | | | | | | 19,355,607 | | | $ | 1.31 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted EPS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock options and warrants | | | | | | | 523,831 | | | | | | | | | | | | 1,545,193 | | | | | | | | | | | | 1,156,306 | | | | | | | Stock options | | | | | | | | 336,159 | | | | | | | | | | | | 410,447 | | | | | | | | | | | | 471,955 | | | | | | | | | | | | | 19,513,008 | | | $ | 1.04 | | | | | | | | 18,015,545 | | | $ | 1.49 | | | | | | | | 8,354,387 | | | $ | 1.10 | | | | | | | | 19,734,633 | | | $ | 1.67 | | | | | | | | 20,037,540 | | | $ | 0.69 | | | | | | | | 19,827,562 | | | $ | 1.28 | |
For the years ended December 31, 2020 and 2019, the effect of the 3,202,808 shares issuable upon conversion of the Convertible Senior Notes were excluded from the diluted net income per share calculation because the Company’s average stock price did not exceed $53.86 during the period.
Note 20.21. Segment Information:Information
In accordance with ASC 280, Segment Reporting, the Company has three reportable segments, (1) Smokeless products; Zig-Zag Products; (2) Smoking Stoker’s Products; and (3) NewGen Products. The Zig-Zag Products segment markets and distributes (a) rolling papers, tubes, and related products; and (3) NewGen products.(b) finished cigars and MYO cigar wraps. The Smokeless productsStoker’s Products segment (a) manufactures and markets moist snuff and (b) contracts for and markets loose leaf chewing tobacco products. The Smoking products segment (a) imports and markets cigarette papers, tubes, and related products; (b) imports and markets finished cigars, MYO cigar tobaccos, and cigar wraps; and (c) processes, packages, and markets pipe tobaccos. The NewGen productsProducts segment (a) markets e-cigarettes, e-liquids, vaporizers, and other relateddistributes CBD, liquid vapor products and certain other products without tobacco and/or nicotine; (b) distributes a wide assortment of vaping products to non-traditional retail outlets via VaporBeastVaporBeast; and Vapor Shark. Smokeless(c) markets and Smokingdistributes a wide assortment of products to individual consumers via the VaporFi B2C online platform. Products in the Zig-Zag Products and Stoker’s Products segments are distributed primarily through wholesale distributors in the United States while products in the NewGen productsProducts segment are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the United States. The Other segment includes the costs and assets of the Company not assigned to one of the three3 reportable segments such as intercompany transfers, deferred taxes, and deferred financing fees, for the Revolving Credit Facility.and investments in subsidiaries. The Company had no0 customer that accounted for more than 10% of grossnet sales in 2017, 2016,2020, 2019, or 2015.2018.
The accounting policies of these segments are the same as those of the Company. Segment data includes a charge allocating corporateCorporate costs are not directly charged to the three reportable segments based on their respective net sales.in the ordinary course of operations. The Company evaluates the performance of its segments and allocates resources to them based on operating income.
The tabletables below presentspresent financial information about reported segments:
| | December 31, | | | | | 2017 | | | 2016 | | | 2015 | | | For the year ended December 31, | | | | | | | | | | | | | 2020 | | | 2019 | | | 2018 | | Net sales | | | | | | | | | | | | | | | | | | | Smokeless products | | $ | 84,560 | | | $ | 77,913 | | | $ | 74,293 | | | Smoking products | | | 109,956 | | | | 111,005 | | | | 105,898 | | | Zig-Zag products | | | $ | 132,812 | | | $ | 108,733 | | | $ | 111,507 | | Stoker’s products | | | | 115,866 | | | | 99,894 | | | | 90,031 | | NewGen products | | | 91,261 | | | | 17,310 | | | | 17,065 | | | | 156,433 | | | | 153,362 | | | | 131,145 | | Total | | | $ | 405,111 | | | $ | 361,989 | | | $ | 332,683 | | | | $ | 285,777 | | | $ | 206,228 | | | $ | 197,256 | | | | | | | | | | | | | | Gross profit | | | | | | | | | | | | | | Zig-Zag products | | | $ | 78,232 | | | $ | 59,386 | | | $ | 57,043 | | Stoker’s products | | | | 61,456 | | | | 52,277 | | | | 46,490 | | NewGen products | | | | 49,948 | | | | 25,083 | | | | 39,026 | | Total | | | $ | 189,636 | | | $ | 136,746 | | | $ | 142,559 | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | Smokeless products | | $ | 19,099 | | | $ | 14,501 | | | $ | 17,312 | | | Smoking products | | | 28,500 | | | | 29,790 | | | | 28,030 | | | Zig-Zag products | | | $ | 61,886 | | | $ | 45,058 | | | $ | 42,650 | | Stoker’s products | | | | 44,734 | | | | 34,665 | | | | 28,920 | | NewGen products | | | 1,943 | | | | (510 | ) | | | (636 | ) | | | 5,801 | | | | (20,629 | ) | | | 6,752 | | Other (1) | | | (42 | ) | | | (196 | ) | | | (195 | ) | | Corporate unallocated (1)(2) | | | | (48,348 | ) | | | (32,235 | ) | | | (29,838 | ) | Total | | | $ | 64,073 | | | $ | 26,859 | | | $ | 48,484 | | | | $ | 49,500 | | | $ | 43,585 | | | $ | 44,511 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | (16,889 | ) | | | (26,621 | ) | | | (34,284 | ) | | Interest expense, net | | | | 20,226 | | | | 17,342 | | | | 14,819 | | Investment income | | | 438 | | | | 768 | | | | - | | | | (198 | ) | | | (2,648 | ) | | | (424 | ) | Loss on extinguishment of debt | | | (6,116 | ) | | | (2,824 | ) | | | - | | | | 0 | | | | 1,308 | | | | 2,384 | | Net periodic benefit (income) cost, excluding service cost | | | | 989 | | | | (4,961 | ) | | | 131 | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 26,933 | | | | 14,908 | | | | 10,227 | | | $ | 43,056 | | | $ | 15,818 | | | $ | 31,574 | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditures | | | | | | | | | | | | | | | | | | | | | | | | | Smokeless products | | $ | 1,928 | | | $ | 2,975 | | | $ | 1,602 | | | Zig-Zag products | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Stoker’s products | | | | 5,815 | | | | 2,823 | | | | 1,559 | | NewGen products | | | 93 | | | | 232 | | | | - | | | | 320 | | | | 1,992 | | | | 708 | | | | $ | 2,021 | | | $ | 3,207 | | | $ | 1,602 | | | Total | | | $ | 6,135 | | | $ | 4,815 | | | $ | 2,267 | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | | | | | | | | | | | | | | | | | | | | | | | Smokeless products | | $ | 1,400 | | | $ | 1,227 | | | $ | 1,059 | | | Zig-Zag products | | | $ | 182 | | | $ | 0 | | | $ | 0 | | Stoker’s products | | | | 2,215 | | | | 1,608 | | | | 1,360 | | NewGen products | | | 928 | | | | 58 | | | | - | | | | 2,621 | | | | 2,481 | | | | 1,750 | | | | $ | 2,328 | | | $ | 1,285 | | | $ | 1,059 | | | Total | | | $ | 5,018 | | | $ | 4,089 | | | $ | 3,110 | |
| | December 31, | | | | 2017 | | | 2016 | | Assets | | | | | | | Smokeless products | | $ | 94,559 | | | $ | 89,835 | | Smoking products | | | 141,869 | | | | 146,933 | | NewGen products | | | 44,914 | | | | 39,415 | | Other (1) | | | 935 | | | | 8,837 | | | | $ | 282,277 | | | $ | 285,020 | |
(1) | Includes corporate costs that are not allocated to any of the 3 reportable segments. |
(2) | Includes costs related to PMTA of $14.4 million and $2.2 million in 2020 and 2019, respectively. |
| | December 31, 2020 | | | December 31, 2019 | | Assets | | | | | | | Zig-Zag products | | $ | 207,518 | | | $ | 145,831 | | Stoker’s products | | | 126,292 | | | | 120,723 | | NewGen products | | | 91,116 | | | | 90,899 | | Corporate unallocated (1) | | | 64,407 | | | | 89,131 | | Total | | $ | 489,333 | | | $ | 446,584 | |
(1) | Includes assets not assigned to the 3 reportable segments. All goodwill has been allocated to the reportable segments. |
Revenue Disaggregation—Sales Channel
Revenues of the Zig-Zag Products and Stoker’s Products segments are primarily comprised of sales made to wholesalers while NewGen sales are made business to business and business to consumer, both online and through our costs and assets thatcorporate retail stores. NewGen net sales are not assigned to our three reportable segments, such as intercompany transfers, deferred taxes, and investments in subsidiaries. All goodwill has been allocated to our reportable segments.broken out by sales channel below.
| | NewGen Segment | | | | For the year ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | | | | | | | | | | | Business to Business | | $ | 107,976 | | | $ | 112,580 | | | $ | 105,736 | | Business to Consumer - Online | | | 43,517 | | | | 31,348 | | | | 15,624 | | Business to Consumer - Corporate store | | | 4,751 | | | | 9,273 | | | | 9,631 | | Other | | | 189 | | | | 161 | | | | 154 | | Total | | $ | 156,433 | | | $ | 153,362 | | | $ | 131,145 | |
Net Sales: Domestic and Foreign
The following table shows a breakdown of consolidated net sales between domestic and foreign.
| | | For the year ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2020 | | | 2019 | | | 2018 | | Domestic | | $ | 272,927 | | | $ | 196,348 | | | $ | 188,647 | | | $ | 391,705 | | | $ | 347,616 | | | $ | 317,046 | | Foreign | | | 12,850 | | | | 9,880 | | | | 8,609 | | | | 13,406 | | | | 14,373 | | | | 15,637 | | Total | | $ | 285,777 | | | $ | 206,228 | | | $ | 197,256 | | | $ | 405,111 | | | $ | 361,989 | | | $ | 332,683 | |
Note 21.22. Selected Quarterly Financial Information (Unaudited):
The following table presents the quarterly operating results:
| | 1st | | | 2nd | | | 3rd | | | 4th | | | 1st | | | 2nd | | | 3rd | | | 4th | | 2017 | | | | | | | | | | | | | | 2020 | | | | | | | | | | | | | | Net sales | | $ | 66,788 | | | $ | 72,086 | | | $ | 73,340 | | | $ | 73,563 | | | $ | 90,689 | | | $ | 104,963 | | | $ | 104,174 | | | $ | 105,285 | | Gross profit | | $ | 27,666 | | | | 31,995 | | | | 32,930 | | | | 32,278 | | | | 41,431 | | | | 48,092 | | | | 48,307 | | | | 51,806 | | Net income attributable to Turning Point Brands, Inc. | | $ | 1,877 | (1) | | | 7,439 | | | | 7,374 | | | | 3,519 | | | Consolidated net income | | | | 3,275 | | | | 9,227 | | | | 7,796 | | | | 12,743 | | Basic net income (loss) per share | | | | 0.17 | | | | 0.47 | | | | 0.41 | | | | 0.67 | | Diluted net income (loss) per share | | | $ | 0.16 | | | $ | 0.47 | | | $ | 0.40 | | | $ | 0.65 | | | | | | | | | | | | | | | | | | | | 2019 | | | | | | | | | | | | | | | | | | Net sales | | | $ | 91,628 | | | $ | 93,339 | | | $ | 96,800 | | | $ | 80,222 | | Gross profit | | | | 40,464 | | | | 41,183 | | | | 42,816 | | | | 12,283 | | Consolidated net income | | | | 6,560 | | | | 13,205 | | | | 6,274 | | | | (12,265 | )(1)(2) | Basic net income per share | | | 0.10 | | | | 0.39 | | | | 0.39 | | | | 0.18 | | | | 0.34 | | | | 0.67 | | | | 0.32 | | | | (0.62 | ) | Diluted net income per share | | | 0.10 | | | | 0.38 | | | | 0.38 | | | | 0.18 | | | $ | 0.33 | | | $ | 0.66 | | | $ | 0.31 | | | $ | (0.62 | ) | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | Net sales | | $ | 49,866 | | | $ | 51,581 | | | $ | 50,959 | | | $ | 53,822 | | | Gross profit | | | 24,647 | | | | 24,874 | | | | 24,618 | | | | 26,217 | | | Net income | | | 2,234 | | | | 799 | (2) | | | 6,793 | | | | 17,087 | (3) | | Basic net income per share | | | 0.31 | | | | 0.05 | | | | 0.38 | | | | 0.93 | | | Diluted net income per share | | | 0.27 | | | | 0.05 | | | | 0.34 | | | | 0.87 | | |
(1) | Includes $3,792corporate and vapor restructuring costs of loss on extinguishment of debt,$12.7 million net of tax of $2,324 $5.1 million |
(2) | Includes $2,824an immaterial out of loss on extinguishmentperiod non-cash adjustment of debt,$0.8 million net of tax of $0$0.3 million related to the prior quarters of 2019 |
(3) | Includes $12,719 of deferred income tax benefits |
The amounts presented in the table above are computed independently for each quarter. As a result, their sum may not equal the total year amounts.
Note 22. Dividends:23. Dividends
On November 9, 2017, the Company’s Board of Directors approved the initiation of a cash dividend to shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15, 2017 to shareholders of record at the close of business on November 27, 2017. The most recent dividend of $0.05 per common share, an increase of approximately 25%, was paid on January 8, 2021, to shareholders of record at the close of business on December 18, 2020.
Dividends, among other disbursements assets, are classified as restricted payments within the 20172018 Credit Facility. The Company is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, the Company is not in default. Additional restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year to the aggregate amount of mandatory and voluntary principal payments made on the priority term loans during the fiscal year.
Note 23.24. Subsequent Events:Events
On March 7, 2018,February 11, 2021, the Company entered into an agreement with Fifth Third Bank, as administrative agent,closed a private offering (the “Offering”) of $250 million aggregate principal amount of its 5.625% senior secured notes due 2026(the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of5.625% and other lenders (the “2018 First Lien Credit Facility”)will mature on February 15, 2026.The Company used the proceeds from the Offering (i) to repay all obligations under and an agreement with Prospect Capital Corporation, as administrative agent, and other lenders (the “2018 Second Lien Credit Facility,” and, together withterminate the 2018 First Lien Credit Facility, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.
In connection with the “2018Offering, the Company also entered into a new $25 million senior secured revolving credit facility (the “New Revolving Credit Facility”), to amend and extend the 2017 Credit Facility.. The Company is still evaluatingdid not draw any borrowings under the impact of the transaction; however, it expects a loss on extinguishment of debt of approximately $2.4 million in the first quarter of 2018.
The $250 million 2018 Credit Facility consists of a First Lien Credit Facility, with a $50 millionNew Revolving Credit Facility and a $160 million First Lien Term Loan, and a $40 million Second Lien Term Loan. The maturityon the effective date of the First Lien Term Loan was extended to March 7, 2023, and the maturityfacility but did have letters of the Second Lien Term Loan was extended to March 7, 2024.credit of approximately $3.6 million outstanding. The 2018 First Lien Credit Facility retains the accordion feature allowing the Company to borrow up to an additional $40 million upon the satisfaction of certain conditions, including obtaining commitments from one or more lenders. Borrowings under theNew Revolving Credit Facility may be used for general corporate purposes, including acquisitions.
The 2018 Credit Facility repaid the 2017 Second Out Term Loan, which had an interest rate of LIBOR plus 6% (subject to a floor of 1.00%) and required quarterly required payments of $0.1 million. The amendment also repaid $15 millionwill mature on August 11, 2025 if none of the 2017 Second Lien Term Loan.Company’s Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.
The 2018 Credit Facility First Lien Term Loan and the Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on the Company’s senior leverage ratio. The First Lien Term Loan has quarterly required payments of $1.9 million beginning June 30, 2018, increasing to $2.9 million on June 30, 2020, and increasing to $3.9 million on June 30, 2022. The 2018 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.50x with step-downs to 3.00x, a maximum total leverage ratio of 4.50x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x.
The 2018 Credit Facility Second Lien Term Loan bears interest at a rate of LIBOR plus 7.00%. The Second Lien Credit Facility contains certain financial covenants including a maximum senior leverage ratio of 4.00x with step-downs to 3.50x, a maximum total leverage ratio of 5.00x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of December 31, 2017,2020, the Company’s management, with participation of the Company’s President and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.2020, at the reasonable assurance level.
Internal Control
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report that provides management’s assessment of our internal control over financial reporting as part of this Annual Report on Form 10-K for the year ended December 31, 2017.2020. Management’s report is included below under the caption entitled “Management’s Report on Internal Control Over Financial Reporting,” and is incorporated herein by reference. Our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2017 that have materially affected, or are reasonably likely to materially affect, Turning Point Brand, Inc.’s internal controls over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The consolidated financial statements appearing in this Annual Report have been prepared by the management that is responsible for their preparation, integrity, and fair presentation. The statements have been prepared in accordance with U.S. generally accepted accounting principles, which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer,CEO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017,2020, based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO)(“COSO ICIF”).
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Based on thatour evaluation under the framework in COSO ICIF, our management concluded that our internal control over financial reporting was effective based onat the criteria described abovereasonable assurance level as of December 31, 2017.2020. In conducting management’s evaluation as described above, ReCreation was excluded. The operations of ReCreation excluded from management’s assessment of internal control over financial reporting, represent approximately 0% of the Company’s consolidated revenues and approximately 2% of total assets as of December 31, 2020.
Our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012.
Changes in Internal Controls over Financial Reporting
Management has determined that there were no changes in the Company’s internal controls over financial reporting during the fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| /s/ Lawrence S. Wexler | /s/ Robert Lavan | /s/ Mark A. Stegeman | Brian Wigginton | | Lawrence S. Wexler | Robert Lavan | Mark A. Stegeman | Brian Wigginton | | President and Chief Executive Officer | | Chief Financial Officer | Chief Accounting Officer | | | | | | Date: February 19, 2021 | Date: March 8, 2018February 19, 2021 | | March 8, 2018 | Date: February 19, 2021 |
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 20182021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2017.2020.
Item 11. Executive Compensation
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 20182021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2017.2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 20182021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2017.2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 20182021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2017.2020.
Item 14. Principal Accountant Fees and Services
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 20182021 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2017.2020.
PART IV Item 15. Exhibits and Financial Statement Schedules
| (1) | Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. |
| | | | (2) | Financial Statement Schedule: Information required by this item is included within the consolidated financial statements or notes in Item 8 of this Annual Report on Form 10-K. |
| | | | (3) | Exhibits – See (b) below |
| b) | Exhibits | Index to Exhibits |
Index to Exhibits
Exhibit No. | Description | | | | International Vapor Group Stock Purchase Agreement dated as of September 5, 2018, between Turning Point Brands, Inc. and International Vapor Group, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 17, 2016,7, 2018). | | | | Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among National Tobacco Company, L.P., the Sellers named thereinTPB, SDI and Smoke Free Technologies, Inc.Merger Sub. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on November 17, 2016)April 8, 2020). | | | | Second Amended and Restated Certificate of Incorporation of Turning Point Brands, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2016). | | | | Second Amended and Restated By-laws (incorporated by reference to Exhibit 3.33.1 to the Registrant’s Registration StatementQuarterly Report on Form S-1/A (File No. 333-207816)10-Q filed on November 24, 2015)October 27, 2020). | | | | Registration Rights Agreement of Turning Point Brands, Inc. dated May 10, 2016, between Turning Point Brands, Inc. and the Stockholders named therein (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2016). | | | | Description of Securities. (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). | | | | Indenture dated as of July 30, 2019, between Turning Point Brands, Inc. and GLAS Trust Company LLC, (including the form of Note as Exhibit A thereto) (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on July 30, 2019). | | | | Turning Point Brands, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 5, 2015). † | | | | Form of Stock Option Award Agreement under the 2015 Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2017). † | | | | Form of Performance-Based Restricted Stock Unit Award Agreement under the Turning Point Brands, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on May 11, 2017). † | | | | 2006 Equity Incentive Plan of Turning Point Brands, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 5, 2015). † | | | | Amendment No. 1 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2017). † | | | | Amendment No. 2 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2017). † | | | | Amendment No. 3 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 7, 2017). † | | | | Amendment No. 4 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.54 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2017). † | | | | Form of Award Agreement under the 2006 Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 5, 2015). † | | |
| Form of Cash-Out Agreement under the 2006 Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 7, 2017). † | | | | Form of Indemnification Agreement between Turning Point Brands, Inc. and certain directors and officers (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). | | | | Form of Indemnification Agreement between Turning Point Brands, Inc. and Standard General Master Fund, L.P. (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). | | | | Employment Agreement between Turning Point Brands, Inc. and Lawrence Wexler dated November 23, 2015 (incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K filed on May 16, 2016). † | | | | Employment Agreement between Turning Point Brands, Inc. and James Dobbins dated November 23, 2015 (incorporated by reference to Exhibit 10.10 to the Registrant’s Current Report on Form 8-K filed on May 16, 2016). |
| Employment Agreement between Turning Point Brands, Inc. and Mark Stegeman,Mr. Robert M. Lavan dated November 23, 2015March 13, 2018 (incorporated by reference to Exhibit 10.1110.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2016)March 19, 2018). † | | | | Amendment No. 1 to the Amended and Restated Employment Agreement between Turning Point Brands, Inc. and Thomas F. Helms, Jr. dated December 4, 2015 (incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed on May 16, 2016). | | | | Contract Manufacturing, Packaging and Distribution Agreement dated as of September 4, 2008, between National Tobacco Company, L.P. and Swedish Match North America, Inc. (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). | | | | Amended and Restated Distribution and License Agreement dated as of November 30, 1992, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc., as predecessor to North Atlantic Operating Company, Inc. (U.S.) (incorporated by reference to Exhibit 10.2 to Amendment No. 2 to the Registrant’s Registration Statement (Reg. No. 333-31931) on Form S-4/A filed with the Commission on September 17, 1997). | | | | Amended and Restated Distribution and License Agreement dated as of November 30, 1992, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc., as predecessor to North Atlantic Operating Company, Inc. (Canada) (incorporated by reference to Exhibit 10.4 to Amendment No. 2 to the Registrant’s Registration Statement (Reg. No. 333-31931) on Form S-4/A filed with the Commission on September 17, 1997). | | | | Amendment to the Amended and Restated Distribution and License Agreement dated March 31, 1993 between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Amendment to the Amended and Restated Distribution and License Agreements dated June 10, 1996, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Amendment to the Amended and Restated Distribution and License Agreement dated September 1996, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Restated Amendment to the Amended and Restated Distribution and License Agreement between Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. dated June 25, 1997 (U.S. & Canada) (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the Registrant’s Registration Statement (Reg. No. 333-31931) on Form S-4/A filed with the Commission on September 17, 1997). | | | | Amendment to the Amended and Restated Distribution and License Agreement dated October 22, 1997, between Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997). | | | | Amendment to the Amended and Restated Distribution and License Agreement dated June 19, 2002, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | |
| Trademark Consent Agreement, dated March 26, 1997, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc. (incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Amendment to the Amended and Restated Distribution and License Agreement dated February 28, 2005, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.33 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). |
| | | Amendment to the Amended and Restated Di stributionDistribution and License Agreement dated April 20, 2006, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006). | | | | Amendment to the Amended and Restated Distribution and License Agreement dated March 10, 2010, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.35 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Consent Agreement dated as of April 4, 1997, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc. (incorporated by reference to Exhibit 10.26 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Amendment No. 1 to Consent Agreement dated as of April 9, 1997, between Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Amendment No. 2 to Consent Agreement dated as of June 25, 1997, between Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.28 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Trademark Consent Agreement dated July 31, 2003, among Bolloré Technologies, S.A., North Atlantic Trading Company, Inc. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.32 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Amendment No. 2 to Trademark Consent Agreement dated December 17, 2012, between Bolloré S.A. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.36 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | License and Distribution Agreement dated March 19, 2013 between Bolloré S.A. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.37 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). | | | | Distributors Supply Agreement dated as of April 1, 2013, between National Tobacco Company, L.P. and JJA Distributors, LLC (incorporated by reference to Exhibit 10.38 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). | | | | Amendment No. 1 to the Amended and Restated Exchange and Stockholders’ Agreement dated April 28, 2016 (incorporated by reference to Exhibit 10.44 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on April 28, 2016). | | | | First Lien Credit Agreement dated as of February 17, 2017, by and among Turning Point Brands, Inc., Fifth Third Bank, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 17, 2017). | | | | Second Lien Credit Agreement dated as of February 17, 2017, by and among Turning Point Brands, Inc., as the Borrower, Prospect Capital Corporation, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 17, 2017). | | | | First Lien Guaranty and Security Agreement dated as of February 17, 2017, by and among Turning Point Brands, Inc., Fifth Third Bank, and the lenders party thereto (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 17, 2017). | | | | Second Lien Guaranty and Security Agreement dated as of February 17, 2017, by and among Turning Point Brands, Inc., Prospect Capital Corporation, and the lenders party thereto (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on February 17, 2017). | | | | Intercreditor Agreement dated as of February 17, 2017, by and among Turning Point Brands, Inc., the other grantors party thereto, Fifth Third Bank, as first lien collateral agent, and Prospect Capital Corporation, as second lien collateral agent (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on February 17, 2017). |
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| Amended and Restated First Lien Credit Agreement, dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as the obligors, Fifth Third Bank, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 8, 2018). | | | | Amended and Restated Second Lien Credit Agreement, dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as obligors, Prospect Capital Corporation, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 8, 2018). | | | | Omnibus Amendment, Reaffirmation Agreement and Joinder, dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as the Grantors, Fifth Third Bank, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 8, 2018). | | | | SecondFirst Amendment to the First Lien Omnibus Amendment, ReaffirmationCredit Agreement and Joinder, dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as the Grantors, Fifth Third Bank, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.410.1 to the Registrant’sCompany’s Current Report on Form 10-Q for the period ended June 30, 2019). | | | | Form of Capped Call Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 8, 2018)July 30, 2019). | | | | FirstSecond Amendment to Secondthe First Lien IntercreditorCredit Agreement dated as of March 7, 2018, by and among Turning Point Brands, Inc., and the other grantors party thereto, Fifth Third Bank, as first lien collateral agent, and Prospect Capital Corporation, as second lien collateral agent (incorporated by reference to Exhibit 10.510.48 to the Registrant’s CurrentAnnual Report on Form 8-K10-K filed on March 8, 2018)12, 2020) | | | | Third Amendment to the First Lien Credit Agreement. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on April 28, 2020). | | | | Form of Installment Note issued to VaporBeast Stockholders on November 30, 2016Release and Severance Agreement, dated August 19, 2020, by and among TPB and James W. Dobbins, Senior Vice President and General Counsel. (incorporated by reference to Exhibit 10.1 to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q filed December 2, 2016)on October 27, 2020). † | | | | Form of 18-Month Note issued to VaporBeast Stockholders onConsulting Agreement dated August 19, 2020, but effective November 30, 20161, 2020, between Turning Point Brands, Inc. and James Dobbins. (incorporated by reference to Exhibit 10.2 to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q filed December 2, 2016). | | | | Form of Guaranty to VaporBeast Shareholders dated November 17, 2016 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed December 2, 2016).October 27, 2020) † | | | | Subsidiaries of Turning Point Brands, Inc.* | | | | Consent of RSM US, LLP.* | | | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | | | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | | | | Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | | | | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | | | 101 | XBRL (eXtensible Business Reporting Language). The following materials from Turning Point Brands, Inc.’s Annual Report on Form 10-K for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, formatted in Inline XBRL: (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of changes in stockholder’s equity (deficit), (v) consolidated statements of cash flows, and (vi) notes to the consolidated financial statements.* | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).* |
† | Compensatory plan or arrangement |
Item 16. Form 10-K Summary
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on March 8, 2018.February 19, 2021.
| TURNING POINT BRANDS, INC. | | | | | | | By: | /s/ Lawrence S. Wexler | | | Name: | Lawrence S. Wexler | | | Title: | Title: Chief Executive Officer | | | | | | | By: | /s/ Mark A. Stegeman/s/ Robert Lavan | | | Name: Mark A. Stegeman | Robert Lavan | | | Title: | Chief Financial Officer | | | | | | | By: | /s/ Brian Wigginton | | | Name: | Brian Wigginton | | | Title: | Chief Financial and Accounting Officer | |
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | Signature | | Title | | Date | | | | | | | | | | | By: | /s/ Lawrence S. Wexler | | Director, Chief Executive Officer | | March 8, 2018 | | | | Lawrence S. Wexler | | | | | | | | | | | | By: | /s/ Lawrence S. Wexler | | Director, Chief Executive Officer | | February 19, 2021 | | By: | /s/ Mark A. Stegeman | | Chief Financial and Accounting Officer | | March 8, 2018 | | | | Mark A. Stegeman | Lawrence S. Wexler | | | | | | | | | | | By: | /s/ Robert Lavan | | Chief Financial Officer | | February 19, 2021 | | By: | /s/ Thomas F. Helms, Jr. | | Chairman of the Board of Directors | | March 8, 2018 | | | | Thomas F. Helms, Jr. | Robert Lavan | | | | | | | | | | | By: | /s/ Brian Wigginton | | Chief Accounting Officer | | February 19, 2021 | | By: | /s/ Gregory H. A. Baxter | | Director | | March 8, 2018 | | | | Gregory H. A. Baxter | Brian Wigginton | | | | | | | | | | | By: | /s/ David Glazek | | Chairman of the Board of Directors | | February 19, 2021 | | By: | /s/ H. C. Charles Diao | | Director | | March 8, 2018 | | | | H. C. Charles Diao | David Glazek | | | | | | | | | | | | | | By: | /s/ David GlazekGregory H. A. Baxter | | Director | | March 8, 2018 | February 19, 2021 | | | David Glazek | Gregory H. A. Baxter | | | | | | | | | | | | | | By: | /s/ George W. Hebard IIIH. C. Charles Diao | | Director | | March 8, 2018 | February 19, 2021 | | | George W. Hebard III | H. C. Charles Diao | | | | | | | | | | | By: | /s/ Peggy Hebard | | Director | | February 19, 2021 | | Peggy Hebard | | | | | | | | | | | By: | /s/ Arnold Zimmerman | | Director | | March 8, 2018 | February 19, 2021 | | | Arnold Zimmerman | | | | | | | | | | | By: | /s/ Ashley Davis Frushone | | Director | | February 19, 2021 | | Ashley Davis Frushone | | | | |
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