Turning Point Brands, Inc. - Annual Report: 2022 (Form 10-K)

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FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2022

OR

For the transition period from_______________ to ________________

Commission file number: 001-37763

TURNING POINT BRANDS, INC.

(Exact name of registrant as specified in its charter)

(502) 778-4421

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report: not applicable

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ☐ Yes ☑ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes  ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐ Yes ☑ No

As of June 30, 2022, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was approximately $424 million based on such closing sale price of the common stock as reported on the New York Stock Exchange.

At March 3, 2023, there were 17,562,795 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of stockholders to be held on May 3, 2023, expected to be filed with the Securities and Exchange Commission on or about March 24, 2023, are incorporated by reference into Part III hereof.

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			Page No.
PART I
	ITEM 1.	Business	4
	ITEM 1A.	Risk Factors	16
	ITEM 1B.	Unresolved Staff Comments	35
	ITEM 2.	Properties	35
	ITEM 3.	Legal Proceedings	35
	ITEM 4.	Mine Safety Disclosures	35
PART II
	ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
	ITEM 6.	Selected Financial Data	37
	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
	ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
	ITEM 8.	Financial Statements and Supplementary Data	52
	ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	89
	ITEM 9A.	Controls and Procedures	89
	ITEM 9B.	Other Information	90
PART III
	ITEM 10.	Directors, Executive Officers and Corporate Governance	91
	ITEM 11.	Executive Compensation	91
	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	91
	ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	91
	ITEM 14.	Principal Accountant Fees and Services	91
PART IV
	ITEM 15.	Exhibits and Financial Statement Schedules	92
	ITEM 16.	Form 10-K Summary	96
	Signatures		97

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Zig-Zag® is the #1 premium and #1 overall rolling paper brand in the U.S., with significant distribution in Canada as well. Zig-Zag® is also the #1 MYO cigar wrap brand in the U.S., as measured by MSAi. We acquired North American rolling papers distribution rights for Zig-Zag® in 1997. More importantly, we own the Zig-Zag® tobacco trademark in the U.S. which we leverage for our MYO cigar wraps product. Approximately 42% of our total 2022 Zig-Zag® branded net sales are under our own Zig-Zag® marks rather than those we license from RTI under the Distribution and Licensing Agreements described below.

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Stoker’s® is among the fastest growing MST brands in the industry and is the #1 loose-leaf chewing tobacco brand. We manufacture Stoker’s® MST using only 100% American Leaf, utilizing a proprietary process to produce what we believe is a superior product.2

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In 2009, we extended the Zig-Zag® tobacco brand into the MYO cigar wraps market and captured a 50% market share within the first two years. We are now the market share leader for MYO cigar wraps with approximately a 59% share of the cigar wraps category and 79% of the share of the HTL cigar wraps sub-category. 1 We believe our success was driven by the Zig-Zag® tobacco branding, which we feel is widely understood by consumers to represent a favorable, customizable experience ideally suited to MYO products. In late 2021, we extended our Zig-Zag® MYO cigar wraps offering with entries into the growing hemp wraps and natural leaf wraps markets.

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We extended the Zig-Zag® brand into hemp rolling papers in 2018 and followed that with the launch of paper cones in 2019 with both products quickly establishing leading positions in their respective categories.

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We leveraged the proud legacy and value of the Stoker’s® brand to introduce a 12 oz. MST tub, a size that was not offered by any other market participant at the time of introduction. Stoker’s® MST has been among the fastest growing moist snuff brands in the industry in terms of pounds sold. While competitors have since introduced larger format tub packaging, the early entry and differentiation of the Stoker’s® product have firmly established us as the market leader with over 50% of the tub market as of 2022. In 2015, we introduced Stoker’s® MST in 1.2 oz. cans to further expand retail penetration, particularly in convenience stores.

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Vapor Beast quickly established itself as a leading marketer and distributor of liquid vapor products to the non-traditional retail universe which includes headshops, dispensaries, and B2B e-commerce. With its national footprint, Vapor Beast is leveraging its regional consumer preference insights to drive sales.

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In 2019, the IVG acquisition, and with its VaporFi B2C marketing engine, offered us the opportunity to leverage the marketing competencies and processes to sell novel proprietary products across multiple channels and platforms. In addition, the Solace acquisition provided us with a leading line of liquids.

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In 2019, we introduced Zig-Zag® paper cones into the market and have grown it into one of the top brands in the category.

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In 2021, the acquisition of the Unitabac assets provided a platform to re-introduce the Zig-Zag® brand into a large and growing cigarillo market.

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In 2022, we entered the lighter market through an exclusive distribution agreement for CLIPPER® lighters in the U.S and Canada.

		December 31, 2022				December 31, 2021
Raw materials and work in process		$	7,283			$	6,936
Leaf tobacco			43,468				35,900
Finished goods - Zig-Zag Products			42,279				25,663
Finished goods - Stoker’s Products			9,667				8,959
Finished goods - NewGen Products			15,431				8,591
Other			1,787				1,558
Inventories		$	119,915			$	87,607

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The Environmental Committee provides a platform to enhance and track the progress of our environmental practices within our business units. The committee is charged with recommending, implementing, and monitoring best practices in the areas of carbon emissions, waste, water, and biodiversity within our business units.

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The Social Committee provides a platform to achieve the objective of being the employer of choice. The committee is charged with recommending and implementing best practices in the areas of health and safety, DE&I, Talent Development and Retention, and Community Engagement.

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The Governance Committee provides a platform to assure our governance practices are best in class. The committee is charged with recommending and implementing best practices in the areas of business ethics, political engagement, supply chain processes, and cybersecurity. The committee additionally is charged with recommending and implementing best practices in the areas of Public Health, Responsible Marketing, and Youth Access Prevention.

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declining sales of tobacco products, and expected continuing decline of sales in the tobacco industry overall;

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

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the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption, as well as other supply chain concerns, including delays in product shipments and increases in freight cost;

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

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

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

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intense competition and our ability to compete effectively;

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competition from illicit sources and the damage caused by illicit products to our brand equity;

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contamination of our tobacco supply or products;

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uncertainty and continued evolution of the markets for our  products;

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

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substantial and increasing U.S. regulation;

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

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

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requirement to maintain compliance with master settlement agreement escrow account;

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

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

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

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

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sensitivity of end-customers to increased sales taxes and economic conditions including significant increases in the rate of inflation and other declines in purchasing power;

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uncertainty surrounding FDA compliance policy;

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possible increasing international control and regulation;

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failure to comply with environmental, health and safety regulations;

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

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

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significant product liability litigation;

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our amount of indebtedness;

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the terms of our indebtedness, which may restrict our current and future operations;

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our ability to comply with required disclosure requirements;

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identification of material weaknesses in our internal control over financial reporting, which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price;

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our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;

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our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors (as defined in our Certificate of Incorporation) being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;

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future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us;

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we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;

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our business may be damaged by events outside of our or our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters;

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adverse impact of climate change;

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our reliance on information technology;

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cybersecurity and privacy breaches;

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failure to manage our growth;

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

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fluctuations in our results;

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exchange rate fluctuations;

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adverse U.S. and global economic conditions;

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

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infringement on or misappropriation of our intellectual property;

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

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

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the levying of substantial and increasing tax and duty charges;

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restrictions or bans on advertising, marketing and sponsorship;

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the display of larger health warnings, graphic health warnings and other labeling requirements;

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restrictions on packaging design, including the use of colors and generic packaging;

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restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

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requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;

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requirements regarding testing, disclosure and use of tobacco product ingredients;

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increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

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elimination of duty-free allowances for travelers; and

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encouraging litigation against tobacco companies.

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obtain necessary additional financing for working capital, capital expenditures or other purposes in the future;

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plan for, or react to, changes in our business and the industries in which we operate;

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make future acquisitions or pursue other business opportunities;

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react in an extended economic downturn;

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pay dividends; and

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repurchase stock.

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incur additional debt, disqualified stock and preferred stock;

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pay dividends and make other restricted payments;

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create liens;

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make investments and acquisitions;

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engage in sales of assets and subsidiary stock;

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enter into sale-leaseback transactions;

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enter into transactions with affiliates; and

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transfer all or substantially all of our assets or enter into merger or consolidation transactions.

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our reputation may be adversely affected and our business and operating results could be harmed;

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the market price of our stock could decline;

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we could fail to meet our financial reporting obligations; and

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we could be subject to litigation and/or investigations or sanctions by the SEC, the New York Stock Exchange or other regulatory authorities.

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limitations on the removal of directors;

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limitations on the ability of our stockholders to call special meetings;

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limitations on stockholder action by written consent;

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establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; and

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limitations on the ability of our stockholders to fill vacant directorships or amend the number of directors constituting our board of directors.

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difficulties integrating personnel from acquired entities and other corporate cultures into our business;

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difficulties integrating information systems;

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the potential loss of key employees of acquired companies;

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the assumption of liabilities and exposure to undisclosed or unknown liabilities of acquired companies; or

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the diversion of management attention from existing operations

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 to October 31			41,104			$	21.11				41,104			$	28,521,628
November 1 to November 30			36,905			$	22.02				36,905			$	27,708,979
December 1 to December 31			23,950			$	21.34				23,950			$	27,197,886
Total			101,959								101,959

Brand		Product		TPB Segment		Market Share(1)		Category Rank(1)
Zig-Zag®		Cigarette Papers		Zig-Zag Products		35.0%		#1 premium, #1 overall
Zig-Zag®		MYO Cigar Wraps		Zig-Zag Products		59.2%		#1 overall
Stoker’s®		Moist Snuff		Stoker’s Products		6.3%		#3 discount, #6 overall
Stoker’s®		Chewing Tobacco		Stoker’s Products		28.0%		#1 discount, #1 overall

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Our ability to further penetrate markets with our existing products;

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Our ability to introduce new products and product lines that complement our core business;

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Decreasing interest in tobacco products among consumers;

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Price sensitivity in our end-markets;

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Marketing and promotional initiatives, which cause variability in our results;

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General economic conditions, including consumer access to disposable income and other conditions affecting purchasing power such as inflation;

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Labor and production costs;

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Cost and increasing regulation of promotional and advertising activities;

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Cost of complying with regulation, including FDA regulations;

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Increasing and unpredictable regulation of NewGen products;

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Counterfeit and other illegal products in our end-markets;

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Currency fluctuations;

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Our ability to identify attractive acquisition opportunities; and

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Our ability to successfully integrate acquisitions.

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Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.

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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.

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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.

		For the year ended December 31,
		2022				2021				% Change				2020				% Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products		$	190,403			$	176,491				7.9	%		$	132,812				32.9	%
Stoker’s products			130,826				124,280				5.3	%			115,866				7.3	%
NewGen products			93,784				144,700				-35.2	%			156,433				-7.5	%
Total net sales			415,013				445,471				-6.8	%			405,111				10.0	%
Cost of sales			209,475				227,637				-8.0	%			215,121				5.8	%
Gross profit
Zig-Zag products			106,576				102,739				3.7	%			78,278				31.2	%
Stoker’s products			71,254				68,084				4.7	%			61,764				10.2	%
NewGen products			27,708				47,011				-41.1	%			49,948				-5.9	%
Total gross profit			205,538				217,834				-5.6	%			189,990				14.7	%
Selling, general, and administrative expenses			130,024				127,513				2.0	%			125,563				1.6	%
Operating income			75,514				90,321				-16.4	%			64,427				40.2	%
Interest expense, net			19,524				20,500				-4.8	%			13,487				52.0	%
Investment loss (gain)			13,303				6,673				99.4	%			(198	)			-3470.2	%
Goodwill and intangible impairment loss			27,566				-			NM					-			NM
Gain on extinguishment of debt			(885	)			(2,154	)			-58.9	%			-			NM
Net periodic benefit cost, excluding service cost			-				-			NM					989				-100.0	%
Income before income taxes			16,006				65,302				-75.5	%			50,149				30.2	%
Income tax expense			4,849				14,040				-65.5	%			11,957				17.4	%
Consolidated net income			11,157				51,262				-78.2	%			38,192				34.2	%
Net loss attributable to non-controlling interest			(484	)			(797	)			-39.3	%			-			NM
Net income attributable to Turning Point Brands, Inc.		$	11,641			$	52,059				-77.6	%		$	38,192				36.3	%

(in thousands)		Years ended December 31,
		2022				2021				2020
Consolidated net income		$	11,641			$	52,059			$	38,192
Add:
Interest expense, net			19,524				20,500				13,487
Gain on extinguishment of debt			(885	)			(2,154	)			-
Income tax expense			4,849				14,040				11,957
Depreciation expense			3,388				3,105				3,237
Amortization expense			1,911				1,907				1,781
EBITDA		$	40,428			$	89,457			$	68,654
Components of Adjusted EBITDA
Corporate and vapor restructuring (a)			3,444				1,026				517
ERP/CRM (b)			1,962				-				-
Stock options, restricted stock, and incentives expense (c)			5,273				7,557				2,555
Transactional expenses and strategic initiatives (d)			801				1,267				3,087
FDA PMTA (e)			4,554				1,668				14,435
Non-cash asset impairment (f)			41,136				7,100				-
Other (g)			-				-				988
Adjusted EBITDA		$	97,598			$	108,075			$	90,236

		As of
(in thousands)		December 31, 2022				December 31, 2021
Current assets		$	151,251			$	120,849
Current liabilities			41,376				40,336
Working capital		$	109,875			$	80,513

		December 31, 2022				December 31, 2021
Senior Secured Notes		$	250,000			$	250,000
Convertible Senior Notes			162,500				172,500
Gross notes payable and long-term debt			412,500				422,500
Less deferred finance charges			(5,743	)			(8,328	)
Net notes payable and long-term debt		$	406,757			$	414,172

On or after February 15, 2023			102.813	%
On or after February 15, 2024			101.406	%
On or after February 15, 2025 and thereafter			100.000	%

Sales		Deposits as of December 31,
Year		2022				2021
1999		$	211			$	211
2000			1,017				1,017
2001			1,673				1,673
2002			2,271				2,271
2003			4,249				4,249
2004			3,714				3,714
2005			4,553				4,553
2006			3,847				3,847
2007			4,167				4,167
2008			3,364				3,364
2009			1,619				1,619
2010			406				406
2011			193				193
2012			199				199
2013			173				173
2014			143				143
2015			101				101
2016			91				91
2017			82				82
Total		$	32,073			$	32,073

	Page
Reports of RSM US LLP (PCAOB ID: 49)	53
Financial Statements:
Consolidated Balance Sheets as of December 31, 2022 and 2021	57
Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020	58
Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021, and 2020	59
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020	60
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021, and 2020	62

Turning Point Brands, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2022 and 2021

(dollars in thousands except share data)

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, 2022, 2021, and 2020

(dollars in thousands except share data)

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, 2022, 2021, and 2020

(dollars in thousands)

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, 2022, 2021, and 2020

(dollars in thousands)

Turning Point Brands, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (cont.)

for the years ended December 31, 2022, 2021, and 2020

(dollars in thousands)