PYXUS INTERNATIONAL, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Pyxus provides responsibly produced, independently verified, and traceable agricultural products, ingredients, and services to businesses and customers. Headquartered in the Research Triangle Park region of North Carolina, we contract with growers across five continents to help them produce sustainable, compliant crops. Historically, Pyxus’ core business has been as a tobacco leaf merchant, purchasing, processing, packing, storing, and shipping tobacco to manufacturers of cigarettes and other consumer tobacco products throughout the world. Through our predecessor companies, we have a long operating history in the leaf tobacco industry with some customer relationships beginning in the early 1900s. In an increasing number of markets, we also provide agronomy expertise for growing leaf tobacco. Our contracted tobacco grower base often produces a significant volume of non-tobacco crop utilizing the agronomic assistance that our team provides. Pyxus is working to find markets for these crops as part of our ongoing efforts to improve farmer livelihoods and the communities in which they live. We are committed to responsible crop production which supports economic viability for the grower, provides a safe working atmosphere for those involved in crop production, and minimizes negative environmental impact. Our agronomists maintain frequent contact with growers prior to and during the growing and curing seasons to provide technical assistance to improve the quality and yield of the crop. Throughout the entire production process, from seed-to-sale, our SENTRI SM traceability system provides clear visibility into how products are produced throughout the supply chain, supporting product integrity. Our consolidated operations are managed and reported in ten operating segments that are organized by product category and geographic area and aggregated into three reportable segments for financial reporting purposes: Leaf - North America, Leaf - Other Regions, and Other Products and Services. Due to the seasonal nature of our business, the results of operations for a fiscal quarter are not necessarily indicative of the operating results that may be attained for other quarters or a full fiscal year. COVID-19 We continue to monitor the impact of the COVID-19 outbreak on our Company and our workforce. In March 2020, the World Health Organization recognized the COVID-19 outbreak as a global pandemic. The COVID-19 pandemic and government actions implemented to contain further spread of COVID-19 have severely restricted economic activity around the world. Our production facilities are still operating but, in some instances, at lower production levels than planned due to social distancing requirements and safety practices implemented in accordance with Company policy. We continue to monitor the measures we implemented to reduce the spread of COVID-19 and make updates and improvements, as necessary. While our supply chains and distribution channels continue to experience delays due to COVID-19, we currently have adequate supply of products to meet the near-term forecasted demand. In addition, we have experienced procedural delays during fulfillment of customer orders for leaf tobacco due to COVID-19. Broad economic factors from the COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, may extend billing and collection cycles. Deterioration in the collectability of accounts receivable from extended billing and collection cycles would adversely affect our results of operations, financial condition, and cash flows, leading to working capital constraints. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our business, results of operations, financial condition, and cash flows will be adversely affected. We cannot predict the extent or duration of the COVID pandemic, the effects of the COVID pandemic on the global, national or local economy, or the effect of the COVID pandemic on our business, financial position, results of operations, and cash flows. Bankruptcy Proceedings On June 15, 2020 (the “Petition Date”), Old Holdco, Inc. (then named Pyxus International, Inc.) (“Old Pyxus”) and its then subsidiaries Alliance One International, LLC, Alliance One North America, LLC, Alliance One Specialty Products, LLC and GSP Properties, LLC (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to implement a prepackaged Chapter 11 plan of reorganization to effectuate a financial restructuring (the “Restructuring”) of Old Pyxus’ secured debt. On August 21, 2020, the Bankruptcy Court issued an order (the “Confirmation Order”) confirming the Amended Joint Prepackaged Chapter 11 Plan of Reorganization (the “Plan”) filed by the Debtors in the Chapter 11 Cases. On August 24, 2020 (the “Effective Date”), the Plan became effective in accordance with its terms, and the Debtors emerged from the Chapter 11 Cases. In connection with the satisfaction of the conditions to effectiveness as set forth in the Confirmation Order and the Plan, Old Pyxus completed a series of transactions pursuant to which the business assets and operations of Old Pyxus were vested in a new Virginia corporation, Pyxus Holdings, Inc., which is an indirect subsidiary of the Company. Pursuant to the -52- Confirmation Order and the Plan, at the effectiveness of the Plan all outstanding shares of common stock, and rights to acquire the common stock, of Old Pyxus were cancelled and the shares of common stock of the Company were delivered to certain creditors of Old Pyxus. Refer to “Note 3. Emergence from Voluntary Reorganization under Chapter 11” for additional information. The Company applied Financial Accounting Standards Board (“FASB”) ASC Topic 852 – Reorganizations (“ASC 852”) in preparing the condensed consolidated financial statements. For periods subsequent to the Chapter 11 filing, ASC 852 requires distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Upon the effectiveness of the Plan and the emergence of the Debtors from the Chapter 11 Cases, the Company determined it qualified for fresh start reporting under ASC 852, which resulted in the Company becoming a new entity for financial reporting purposes on the Effective Date (as defined below). Our financial results for the five months ended August 31, 2020 and for the three and nine months ended December 31, 2019 are referred to as those of the “Predecessor.” Our financial results for the three and four months ended December 31, 2020 are referred to as those of the “Successor.” Our results of operations as reported in our Condensed Consolidated Financial Statements for these periods are prepared in accordance with fresh start reporting, which requires that we report on our results for the periods prior to the Effective Date separately from the period following the Effective Date. The Company elected to apply fresh start reporting using a convenience date of August 31, 2020 (the "Fresh Start Reporting Date"). The Company evaluated and concluded the events between August 24, 2020 and August 31, 2020 were not material to the Company's financial reporting on both a quantitative or qualitative basis. Refer to " Note 4. Fresh Start Reporting " for additional information. We do not believe that reviewing the results of periods that span the Fresh Start Reporting Date in isolation would be useful in identifying any trends in or reaching any conclusions regarding our overall operating performance. Management believes that operating metrics for the Successor for the four months ended December 31, 2020 when combined with those of the Predecessor for the five months ended August 31, 2020 provides a more meaningful comparison to the nine-month period ended December 31, 2019 and are useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our Condensed Consolidated Financial Statements in accordance with U.S. GAAP, the table and discussion below also present the combined results for these periods. The combined results (referenced as “Combined (Non-GAAP)” or “combined”) for the nine months ended December 31, 2020 represent the sum of the reported amounts for the Predecessor period April 1, 2020 through August 31, 2020 combined with the Successor period from September 1, 2020 through December 31, 2020. These combined results are not considered to be prepared in accordance with U.S. GAAP. The combined operating results are presented for supplemental purposes only, may not reflect the actual results we would have achieved absent our emergence from bankruptcy, may not be indicative of future results and should not be viewed as a substitute for the financial results of the Predecessor period and Successor period presented in accordance with U.S. GAAP. In the following discussion of results of operations, comparisons of combined results for the nine-month period ended December 31, 2020 are to the comparable U.S. GAAP measures for the nine-month period ended December 31, 2019. CCAA Proceeding On January 21, 2021, Canada's Island Garden Inc. (“Figr East”), Figr Norfolk Inc. (“Figr Norfolk”) and Figr Brands, Inc. (“Figr Brands”, and together with Figr East and Figr Norfolk, the “Canadian Cannabis Subsidiaries”), which are indirect subsidiaries of the Company, applied for relief from their respective creditors pursuant to Canada’s Companies’ Creditors Arrangement Act (the “CCAA”) in the Ontario Superior Court of Justice (Commercial List) (the “Canadian Court”) in Ontario, Canada as Court File No. CV-21-00655373-00CL (the “CCAA Proceeding”). On January 21, 2021, upon application by the Canadian Cannabis Subsidiaries, the Canadian Court issued an order for creditor protection of the Canadian Cannabis Subsidiaries pursuant to the provisions of the CCAA and the appointment of FTI Consulting Canada Inc. to serve as the Canadian Court-appointed monitor of the Canadi an Cannabis Subsidiaries during the pendency of the CCAA Proceeding (the “Monitor”). On January 29, 2021, the Canadian Court issued an order permitting the Canadian Cannabis Subsidiaries to initiate a sale and investment solicitation process to be conducted by the Monitor and its affiliate to solicit interest in, and opportunities for, a sale of, or investment in, all or substantially all, or one or more components, of the assets and/or the business operations of the Canadian Cannabis Subsidiaries. Th ese and other related matters are discussed in greater detail in "Note 25. Subsequent Events" to the "Notes to the Condensed Consolidated Financial Statements" included herein. -53- Results of Operations Three Months Ended December 31, 2020 and 2019 Successor Predecessor Change (in millions) Three months ended December 31, 2020 Three months ended December 31, 2019 $ % Sales and other operating revenues $ 379.6 $ 363.3 $ 16.3 4.5 Cost of goods and services sold 317.0 308.1 8.9 2.9 Gross profit* 62.5 55.1 7.4 13.4 Selling, general, and administrative expenses 45.9 45.9 — — Other income (expense), net 4.7 (0.4) 5.1 1,275.0 Restructuring and asset impairment charges 7.8 0.7 7.1 1,014.3 Operating income 13.5 8.1 5.4 66.7 Interest expense 24.9 32.2 (7.3) (22.7) Interest income 0.1 0.4 (0.3) (75.0) Income tax expense (benefit) 4.5 (0.9) 5.4 600.0 Income from unconsolidated affiliates 7.6 0.3 7.3 2,433.3 Net loss attributable to noncontrolling interests (0.1) (0.5) 0.4 80.0 Net loss attributable to Pyxus International, Inc.* $ (8.2) $ (22.0) $ 13.8 62.7 * Amounts may not equal column totals due to rounding Sales and other operating revenues increased $16.3 million or 4.5% to $379.6 million for the three months ended December 31, 2020 from $363.3 million for the three months ended December 31, 2019. This increase was due to a 5.4% increase in leaf volume and an increase in cannabinoid revenue attributable to sales occurring in most of the Canadian provinces as well as the launch of the GO! cannabinoid product line. These increases were partially offset by a 1.8% decrease in leaf average sales prices. The 5.4% increase in leaf volume was driven by the timing of shipments in North America and South America and was partially offset by a decrease in volume from smaller crop sizes in Africa and shipping delays in Africa caused by the COVID-19 pandemic. The 1.8% decrease in leaf average sales prices was attributable to product mix in Africa, Asia, and Europe having a lower concentration of lamina and was partially offset by product mix having a higher concentration of lamina in North America and changes in foreign exchange rates in Europe. Cost of goods and services sold increased $8.9 million or 2.9% to $317.0 million for the three months ended December 31, 2020 from $308.1 million for the three months ended December 31, 2019. This increase was mainly due to the increase in sales and other operating revenues. Gross profit as a percent of sales increased to 16.5% for the three months ended December 31, 2020 from 15.2% for three months ended December 31, 2019. This increase was attributable to lower conversion costs in South America and changes in foreign exchange rates in Europe. These increases were partially offset by product mix in Africa, Asia, and Europe having a lower concentration of lamina and higher conversion costs in Africa. Selling, general, and administrative expenses were $45.9 million for the three months ended December 31, 2020 and 2019. Selling, general, and administrative expenses for the three months ended December 31, 2020 included $3.3 million of expenses associated with our emergence from the Chapter 11 Cases. Selling, general, and administrative expenses for the three months ended December 31, 2019 included $1.9 million of costs incurred to evaluate and develop plans for a potential partial monetization of interests in subsidiaries in the Other Products and Services segment. Restructuring and asset impairment charges increased $7.1 million or 1,014.3% to $7.8 million for the three months ended December 31, 2020 from $0.7 million for the three months ended December 31, 2019. This increase was attributable to employee separation and impairment charges related to restructuring of certain U.S. operations, which included the industrial hemp and CBD businesses, and the continued restructuring of certain African operations. Interest expense decreased $7.3 million or 22.7% to $24.9 million for the three months ended December 31, 2020 from $32.2 million for the three months ended December 31, 2019. This decrease was driven by lower outstanding long-term debt balances as well as lower balances on the African seasonal lines of credit. -54- Leaf - North America Supplemental Information Successor Predecessor Change (in millions, except per kilo amounts) Three months ended December 31, 2020 Three months ended December 31, 2019 $ % Kilos sold 7.4 7.3 0.1 1.4 Tobacco sales and other operating revenues: Sales and other operating revenues $ 46.6 $ 39.1 $ 7.5 19.2 Average price per kilo 6.30 5.36 0.94 17.5 Processing and other revenues 13.9 13.9 — — Total sales and other operating revenues 60.5 53.0 7.5 14.2 Tobacco cost of goods sold: Tobacco costs 36.7 30.9 5.8 18.8 Transportation, storage, and other period costs 3.8 5.1 (1.3) (25.5) Derivative financial instrument and exchange losses — 0.1 (0.1) (100.0) Total tobacco cost of goods sold 40.5 36.1 4.4 12.2 Average cost per kilo 5.47 4.95 0.52 10.5 Processing and other revenues cost of services sold 12.2 10.9 1.3 11.9 Total cost of goods and services sold 52.7 47.0 5.7 12.1 Gross profit 7.8 6.0 1.8 30.0 Selling, general, and administrative expenses 3.0 2.8 0.2 7.1 Other expense, net (0.2) (0.7) 0.5 71.4 Restructuring and asset impairment charges 0.1 (0.1) 0.2 200.0 Operating income $ 4.5 $ 2.6 1.9 73.1 Total sales and other operating revenues increased $7.5 million or 14.2% to $60.5 million for the three months ended December 31, 2020 from $53.0 million for the three months ended December 31, 2019. This increase was primarily due to 1.4% higher volume driven by the timing of shipments and product mix having a higher concentration of lamina. Cost of goods and services sold increased $5.7 million or 12.1% to $52.7 million for the three months ended December 31, 2020 from $47.0 million for the three months ended December 31, 2019. This increase was mainly due to the increase in sales and other operating revenues. Gross profit as a percent of sales increased to 12.9% for the three months ended December 31, 2020 from 11.3% for the three months ended December 31, 2019. This increase was primarily due to product mix having a higher concentration of lamina. -55- Leaf - Other Regions Supplemental Information Successor Predecessor Change (in millions, except per kilo amounts) Three months ended December 31, 2020 Three months ended December 31, 2019 $ % Kilos sold 82.1 77.6 4.5 5.8 Tobacco sales and other operating revenues: Sales and other operating revenues $ 298.4 $ 293.5 $ 4.9 1.7 Average price per kilo 3.63 3.78 (0.15) (4.0) Processing and other revenues 12.0 13.0 (1.0) (7.7) Total sales and other operating revenues 310.4 306.5 3.9 1.3 Tobacco cost of goods sold: Tobacco costs 232.2 235.6 (3.4) (1.4) Transportation, storage, and other period costs 12.0 12.2 (0.2) (1.6) Derivative financial instrument and exchange losses (gains) 1.3 (0.8) 2.1 262.5 Total tobacco cost of goods sold 245.5 247.0 (1.5) (0.6) Average cost per kilo 2.99 3.18 (0.19) (6.0) Processing and other revenues cost of services sold 10.6 9.8 0.8 8.2 Total cost of goods and services sold 256.1 256.8 (0.7) (0.3) Gross profit 54.3 49.7 4.6 9.3 Selling, general, and administrative expenses 29.9 25.3 4.6 18.2 Other (expense) income, net (0.7) 1.9 (2.6) (136.8) Restructuring and asset impairment charges 2.6 0.8 1.8 225.0 Operating income $ 21.1 $ 25.5 $ (4.4) (17.3) Total sales and other operating revenues increased $3.9 million or 1.3% to $310.4 million for the three months ended December 31, 2020 from $306.5 million for the three months ended December 31, 2019. This increase was due to a 5.8% increase in volume, partially offset by a 4.0% decrease in average sales prices. The increase in volume was driven by the timing of shipments in South America. This volume increase was partially offset by a decrease in volume from smaller crop sizes in Africa and shipping delays in Africa caused by the COVID-19 pandemic. The decrease in average sales prices was attributable to product mix in Africa, Asia, and Europe having a lower concentration of lamina and was partially offset by changes in foreign exchange rates in Europe. Cost of goods and services sold decreased $0.7 million or 0.3% to $256.1 million for the three months ended December 31, 2020 from $256.8 million for the three months ended December 31, 2019. This decrease was mainly due to changes in foreign currency exchange rates in Europe. Gross profit as a percent of sales increased to 17.5% for the three months ended December 31, 2020 from 16.2% for the three months ended December 31, 2019. This increase was attributable to lower conversion costs in South America and changes in foreign exchange rates in Europe. These increases were partially offset by product mix in Africa, Asia, and Europe having a lower concentration of lamina and higher conversion costs in Africa. Selling, general, and administrative expenses increased $4.6 million or 18.2% to $29.9 million for the three months ended December 31, 2020 from $25.3 million for the three months ended December 31, 2019. Selling, general, and administrative expenses as a percent of sales increased to 9.6% for the three months ended December 31, 2020 from 8.3% for the three months ended December 31, 2019. These increases were related to higher allocations of general corporate services. These increases were partially offset by decreases in travel expenses caused by the COVID-19 pandemic and current year savings from restructuring initiatives. -56- Other Products and Services Supplemental Information Successor Predecessor Change (in millions) Three months ended December 31, 2020 Three months ended December 31, 2019 $ % Sales and other operating revenues $ 8.6 $ 3.7 $ 4.9 132.4 Cost of goods and services sold 8.2 4.3 3.9 90.7 Gross profit (loss) 0.4 (0.6) 1.0 166.7 Selling, general, and administrative expenses 13.1 17.8 (4.7) (26.4) Other income (expense), net 5.7 (1.6) 7.3 456.3 Restructuring and asset impairment charges 5.1 — 5.1 100.0 Operating loss $ (12.1) $ (20.0) $ 7.9 39.5 Sales and other operating revenues increased $4.9 million or 132.4% to $8.6 million for the three months ended December 31, 2020 from $3.7 million for the three months ended December 31, 2019. This increase was primarily due to an increase in cannabinoid revenue attributable to sales occurring in most of the Canadian provinces, as well as the launch of the GO! cannabinoid product line in Canada. Cost of goods and services sold increased $3.9 million or 90.7% to $8.2 million for the three months ended December 31, 2020 from $4.3 million for the three months ended December 31, 2019. This increase was mainly due to the increase in sales and other operating revenues. Gross profit (loss) as a percent of sales was 4.7% for the three months ended December 31, 2020 compared to gross profit (loss) as a percent of sales of (16.2)% for the three months ended December 31, 2019. This difference was due to lower conversion costs from higher sales volume. Selling, general, and administrative expenses decreased $4.7 million or 26.4% to $13.1 million for the three months ended December 31, 2020 from $17.8 million for the three months ended December 31, 2019. Selling, general, and administrative expenses as a percent of sales decreased to 152.3% for the three months ended December 31, 2020 from 481.1% for the three months ended December 31, 2019. These decreases were mainly due to higher expenses in the prior year for the evaluation of a partial monetization of the Company's investments in certain businesses in this segment. Restructuring and asset impairment charges of $5.1 million for the three months ended December 31, 2020 were incurred in connection with employee separation and impairment charges related to restructuring of certain U.S. operations, which included the industrial hemp and CBD businesses. -57- Nine Months Ended December 31, 2020 and 2019 Successor Predecessor Combined (Non-GAAP) Predecessor (in millions) Four months ended December 31, 2020 Five months ended August 31, 2020 Nine months ended December 31, 2020 Nine months ended December 31, 2019 Sales and other operating revenues $ 497.4 $ 447.6 $ 945.0 $ 1,022.9 Cost of goods and services sold 424.5 402.6 827.1 867.9 Gross profit 72.9 45.0 117.9 155.1 Selling, general, and administrative expenses 61.6 87.9 149.5 142.6 Other income (expense), net 2.7 (0.5) 2.2 4.1 Restructuring and asset impairment charges 9.0 0.6 9.6 0.9 Operating income (loss) 5.0 (44.0) (39.0) 15.7 Debt retirement expense — 0.8 0.8 — Interest expense 33.1 46.6 79.7 101.3 Interest income 0.2 1.4 1.6 3.0 Reorganization items — 106.0 106.0 — Income tax (benefit) expense (6.1) 0.3 (5.8) 25.2 Income from unconsolidated affiliates 7.8 2.4 10.2 6.7 Net loss attributable to noncontrolling interests (0.5) (1.0) (1.5) (0.9) Net (loss) income attributable to Pyxus International, Inc.* $ (13.5) $ 19.0 $ 5.5 $ (100.3) * Amounts may not equal column totals due to rounding Combined sales and other operating revenues decreased $77.9 million or 7.6% to $945.0 million for the nine months ended December 31, 2020 from $1,022.9 million for the nine months ended December 31, 2019. This decrease was due to a 2.1% decrease in leaf volume, a 6.8% decrease in leaf average selling prices, and the global impact of the COVID-19 pandemic. These decreases were partially offset by an increase in cannabinoid revenue attributable to sales occurring in most of the Canadian provinces, as well as the launch of the GO! cannabinoid product line in Canada. The 2.1% decrease in leaf volume was due to smaller crop sizes in Africa and the timing of shipments in Asia, Europe, and North America, partially due to the COVID-19 pandemic. This decrease was partially offset by higher volume in Asia and South America driven by the timing of shipments. The 6.8% decrease in leaf average sales prices was due to product mix in Europe and South America having a lower concentration of lamina and changes in foreign exchange rates in Europe and South America. This decrease was partially offset by product mix having a higher concentration of lamina in Africa and North America. Combined cost of goods and services sold decreased $40.8 million or 4.7% to $827.1 million for the nine months ended December 31, 2020 from $867.9 million for the nine months ended December 31, 2019. This decrease was mainly due to the decrease in sales and other operating revenues and changes in foreign currency exchange rates in Europe and South America. This decrease was partially offset by inventory write-offs of cannabis and industrial hemp inventory driven by a shift in expected future products mix in response to market supply conditions and continued market price compression. Combined gross profit as a percent of sales decreased to 12.5% for the nine months ended December 31, 2020 from 15.2% for the nine months ended December 31, 2019. This decrease was mainly due to the inventory write-downs described above. This decrease was partially offset by product mix having a higher concentration of lamina in North America. Combined selling, general, and administrative expenses increased $6.9 million or 4.8% to $149.5 million for the nine months ended December 31, 2020 from $142.6 million for the nine months ended December 31, 2019. Combined selling, general, and administrative expenses as a percent of sales increased to 15.8% for the nine months ended December 31, 2020 from 13.9% for the nine months ended December 31, 2019. These increases were driven by $21.8 million of expenses associated with our emergence from the Chapter 11 Cases. These increases were partially offset by lower travel expenses caused by the COVID-19 pandemic, current year savings from restructuring initiatives, and $13.8 million of costs incurred to evaluate and develop plans for a potential partial monetization of interests in subsidiaries in the Other Products and Services segment in the prior year. Combined restructuring and asset impairment charges increased $8.7 million or 966.7% to $9.6 million for the nine months ended December 31, 2020 from $0.9 million for the nine months ended December 31, 2019. This increase was attributable to employee separation and impairment charges related to restructuring of certain U.S. operations, which included the industrial hemp and CBD businesses, and the continued restructuring of certain African operations. -58- Combined interest expense decreased $21.6 million or 21.3% to $79.7 million for the nine months ended December 31, 2020 from $101.3 million for the nine months ended December 31, 2019. This decrease was driven by lower outstanding long-term debt balances, as well as lower balances on the African seasonal lines of credit. Combined reorganization items increased $106.0 million or 100% for the nine months ended December 31, 2020 and were incurred in connection with the Chapter 11 Cases. Combined income tax expense decreased $31.0 million or 123.0% to a benefit of $5.8 million for the nine months ended December 31, 2020 from expense of $25.2 million for the nine months ended December 31, 2019. This decrease was primarily due to the change in the effective tax rate to 21.8% for the nine months ended December 31, 2020 from (30.5%) for the nine months ended December 31, 2019 and the occurrence of certain discrete items during the nine months ended December 31, 2020. Leaf - North America Supplemental Information (in millions, except per kilo amounts) Successor Predecessor Combined (Non-GAAP) Predecessor Four months ended December 31, 2020 Five months ended August 31, 2020 Nine months ended December 31, 2020 Nine months ended December 31, 2019 Kilos sold 10.2 9.5 19.7 21.6 Tobacco sales and other operating revenues: Sales and other operating revenues $ 63.7 $ 51.2 $ 114.9 $ 114.5 Average price per kilo 6.25 5.39 5.83 5.30 Processing and other revenues 16.8 6.5 23.3 24.9 Total sales and other operating revenues 80.5 57.7 138.2 139.4 Tobacco cost of goods sold: Tobacco costs 50.2 39.3 89.5 88.5 Transportation, storage, and other period costs 5.1 5.6 10.7 13.8 Derivative financial instrument and exchange (gains) losses (0.1) 0.3 0.2 0.1 Total tobacco cost of goods sold 55.2 45.2 100.4 102.4 Average cost per kilo 5.41 4.76 5.10 4.74 Processing and other revenues cost of services sold 14.6 4.4 19.0 18.7 Total cost of goods and services sold 69.8 49.6 119.4 121.1 Gross profit 10.7 8.1 18.8 18.3 Selling, general, and administrative expenses 4.7 7.2 11.9 11.3 Other expense, net (0.3) (0.5) (0.8) (1.2) Restructuring and asset impairment charges 0.3 — 0.3 (0.1) Operating income $ 5.4 $ 0.4 $ 5.8 $ 5.9 Combined total sales and other operating revenues decreased $1.2 million or 0.9% to $138.2 million for the nine months ended December 31, 2020 from $139.4 million for the nine months ended December 31, 2019. This decrease was due to a 8.8% decrease in volume attributable to timing of shipments. This decrease was partially offset by a 10.0% increase in average sales price due to product mix having a higher concentration of lamina. Combined cost of goods and services sold decreased $1.7 million or 1.4% to $119.4 million for the nine months ended December 31, 2020 from $121.1 million for the nine months ended December 31, 2019. This decrease was mainly due to the decrease in sales and other operating revenues. Combined gross profit as a percent of sales increased slightly to 13.6% for the nine months ended December 31, 2020 from 13.1% for the nine months ended December 31, 2019 due to a 10.0% increase in average sales price due to product mix having a higher concentration of lamina. -59- Leaf - Other Regions Supplemental Information (in millions, except per kilo amounts) Successor Predecessor Combined (Non-GAAP) Predecessor Four months ended December 31, 2020 Five months ended August 31, 2020 Nine months ended December 31, 2020 Nine months ended December 31, 2019 Kilos sold 107.8 102.5 210.3 213.3 Tobacco sales and other operating revenues: Sales and other operating revenues $ 387.8 $ 355.9 $ 743.7 $ 825.3 Average price per kilo 3.60 3.47 3.54 3.87 Processing and other revenues 19.6 24.6 44.2 42.5 Total sales and other operating revenues 407.4 380.5 787.9 867.8 Tobacco cost of goods sold: Tobacco costs 304.8 292.0 596.8 665.6 Transportation, storage, and other period costs 17.9 16.9 34.8 37.2 Derivative financial instrument and exchange losses (gains) 1.7 (1.6) 0.1 (0.4) Total tobacco cost of goods sold 324.4 307.3 631.7 702.4 Average cost per kilo 3.01 3.00 3.00 3.29 Processing and other revenues cost of services sold 15.9 20.0 35.9 32.5 Total cost of goods and services sold 340.3 327.3 667.6 734.9 Gross profit 67.1 53.2 120.3 132.9 Selling, general, and administrative expenses 38.3 54.5 92.8 79.1 Other (expense) income, net (0.1) 0.8 0.7 6.2 Restructuring and asset impairment charges 3.7 0.5 4.2 1.0 Operating income (loss) $ 25.0 $ (1.0) $ 24.0 $ 59.0 Combined total sales and other operating revenues decreased $79.9 million or 9.2% to $787.9 million for the nine months ended December 31, 2020 from $867.8 million for the nine months ended December 31, 2019. This decrease was due to an 8.5% decrease in average sales prices and a 1.4% decrease in volume. The decrease in average sales price was due to product mix in Europe and South America having a lower concentration of lamina and changes in foreign exchange rates in Europe and South America. This decrease was partially offset by product mix in Africa having a higher concentration of lamina. The decrease in volume was driven by smaller crop sizes in Africa and the timing of shipments in Africa and Europe, partially due to the COVID-19 pandemic. This decrease was partially offset by higher volume in Asia and South America driven by the timing of shipments. Combined cost of goods and services sold decreased $67.3 million or 9.2% to $667.6 million for the nine months ended December 31, 2020 from $734.9 million for the nine months ended December 31, 2019. This decrease was mainly due to the decrease in sales and other operating revenues and changes in foreign currency exchange rates in Europe and South America. Combined gross profit as a percent of sales was 15.3% for the nine months ended December 31, 2020 and 2019. Combined selling, general, and administrative expenses increased $13.7 million or 17.3% to $92.8 million for the nine months ended December 31, 2020 from $79.1 million for the nine months ended December 31, 2019. Combined selling, general, and administrative expenses as a percent of sales increased to 11.8% for the nine months ended December 31, 2020 from 9.1% for the nine months ended December 31, 2019. These increases were related to the decrease in sales and other operating revenues and higher allocations of general corporate services. These increases were partially offset by lower travel expenses caused by the COVID-19 pandemic and current year savings from restructuring initiatives. -60- Other Products and Services Supplemental Information (in millions, except per kilo amounts) Successor Predecessor Combined (Non-GAAP) Predecessor Four months ended December 31, 2020 Five months ended August 31, 2020 Nine months ended December 31, 2020 Nine months ended December 31, 2019 Sales and other operating revenues $ 9.5 $ 9.4 $ 18.9 $ 15.7 Cost of goods and services sold 14.5 25.7 40.2 11.8 Gross (loss) profit (5.0) (16.3) (21.3) 3.9 Selling, general, and administrative expenses 18.6 26.2 44.8 52.2 Other income (expense), net 3.3 (0.8) 2.5 (0.9) Restructuring and asset impairment charges 5.1 — 5.1 — Operating loss $ (25.4) $ (43.3) $ (68.7) $ (49.2) Combined sales and other operating revenues increased $3.2 million or 20.4% to $18.9 million for the nine months ended December 31, 2020 from $15.7 million for the nine months ended December 31, 2019. This increase was primarily due to an increase in cannabinoid revenue attributable to sales occurring in most of the Canadian provinces as well as the launch of the GO! cannabinoid product line in Canada. This increase was partially offset by a decrease in e-liquids revenue related to a general industry slow-down amid health and regulatory concerns, and the global impact of the COVID-19 pandemic. Combined cost of goods and services sold increased $28.4 million or 240.7% to $40.2 million for the nine months ended December 31, 2020 from $11.8 million for the nine months ended December 31, 2019. This increase was mainly due to inventory write-offs of cannabis and industrial hemp inventory driven by a shift in expected future products mix in response to market supply conditions and continued market price compression. Combined gross (loss) profit as a percent of sales decreased to (112.7)% for the nine months ended December 31, 2020 from 24.8% for the nine months ended December 31, 2019. This decrease was mainly due to the inventory write-downs described above. Combined selling, general, and administrative expenses decreased $7.4 million or 14.2% to $44.8 million for the nine months ended December 31, 2020 from $52.2 million for the nine months ended December 31, 2019. Combined selling, general, and administrative expenses as a percent of sales decreased to 237.0% for the nine months ended December 31, 2020 from 332.5% for the nine months ended December 31, 2019. These decreases were mainly due to higher expenses in the prior year for the evaluation of a partial monetization of the Company's investments in certain businesses. Restructuring and asset impairment charges of $5.1 million for the nine months ended December 31, 2020 were incurred in connection with employee separation and impairment charges related to restructuring of certain U.S. operations, which included the industrial hemp and CBD businesses. Liquidity and Capital Resources Overview The following transactions occurred at or prior to the Effective Date, as contemplated by the Plan: • Claims with respect to the Company’s $275.0 million of 8.5% First Lien Notes due 2021 were satisfied by the issuance of 10.0% First Lien Notes due in 2024 in the aggregate principal amount of $280.8 million. • Claims with respect to the Company’s $635.7 million of 9.875% Second Lien Notes due 2021 were satisfied by the issuance of approximately 12.5 million shares of common stock and a $2.2 million cash payment. • Claims with respect to the DIP Facility were satisfied by the issuance of $213.4 million aggregate principal amount of the Term Loans due February 24, 2025. • Claims with respect to the $60.0 million ABL in existence at the Petition Date were repaid in full during the pendency of the Chapter 11 Cases with proceeds from borrowings under the DIP Facility, and at the Effective Date the Company entered into the ABL Credit Agreement providing a new $75.0 million ABL Credit Facility that is due on February 24, 2023, with $67.5 million of borrowings thereunder outstanding as of December 31, 2020. -61- • The Company’s $255.0 million African seasonal line of credit with TDB was amended and restated, which resulted in an increase in the line of credit with TDB to $285.0 million. Our liquidity requirements are affected by various factors from our core tobacco leaf business, including crop seasonality, foreign currency and interest rates, green tobacco prices, customer mix and shipping requirements, crop size, and quality. Our leaf tobacco business is seasonal, and purchasing, processing, and selling activities have several associated peaks where cash on-hand and outstanding indebtedness may vary significantly during the fiscal year. Additionally, our liquidity requirements are affected by branding, marketing, and advertising expenses to support growth of the Other Products and Services segment, legal and professional costs, and funding obligations under the Canadian DIP Facility during the pendency of the CCAA Proceeding. Although we believe that our sources of liquidity will be sufficient to fund our anticipated needs for the next twelve months, we anticipate periods during which our liquidity needs will approach the levels of our anticipated available cash and permitted borrowings under our credit facilities. Unanticipated developments affecting our liquidity needs, including with respect to the foregoing factors, and sources of liquidity, including impacts affecting our cash flows from operations and the availability of capital resources (including an inability to renew or refinance seasonal lines of credit), may result in a deficiency in liquidity. To address a potential liquidity deficiency, we may undertake plans to minimize cash outflows, which could include exiting operations that do not generate positive cash flow. It is possible that, depending on the occurrence of events affecting our liquidity needs and sources of liquidity, such plans may not be sufficient to adequately or timely address a liquidity deficiency. As of December 31, 2020, shipping of the Africa and South America crops continues with South America beginning to buy the next crop in January. The North America flue-cured crop and Asia are completing processing with Europe beginning to buy and process the next crop. Working Capital The following is a summary of items from the condensed consolidated balance sheets: Successor Predecessor (in millions except for current ratio) December 31, 2020 December 31, 2019 March 31, 2020 Cash and cash equivalents $ 123.2 $ 72.2 $ 170.2 Trade and other receivables, net 194.0 192.7 239.7 Inventories and advances to tobacco suppliers 833.6 933.4 768.9 Total current assets 1,217.9 1,254.0 1,232.4 Notes payable to banks 433.6 580.3 540.2 Accounts payable 51.9 61.1 67.1 Advances from customers 24.9 19.2 18.8 Total current liabilities 626.2 804.9 789.1 Current ratio 1.9 to 1 1.6 to 1 1.6 to 1 Working capital 591.7 449.1 443.3 Long-term debt 551.9 902.5 904.3 Stockholders’ equity attributable to Pyxus International, Inc. 376.2 85.5 (78.0) Working capital increased to $591.7 million at December 31, 2020 from $449.1 million at December 31, 2019 primarily due to lower balances on the African seasonal lines of credit resulting from cash payments and shorter crops resulting in decreased inventory purchases. Sources and Uses of Cash Our primary sources of liquidity are cash generated from operations, cash collections from our securitized receivables, borrowings under the ABL Credit Facility, and short-term borrowings under our foreign seasonal lines of credit. We have typically financed our non-U.S. tobacco operations with uncommitted short-term foreign seasonal lines of credit. These foreign lines of credit are seasonal in nature corresponding to the tobacco crop cycle in that market. These short-term foreign seasonal lines of credit are typically uncommitted and provide lenders the right to cease making loans and demand repayment of loans. These short-term foreign seasonal lines of credit are typically renewed at the outset of each tobacco season. We maintain various other financing arrangements to meet the cash requirements of our businesses. See Note 15. "Debt Arrangements" for additional information. We utilize capital in excess of cash flow from operations to finance accounts receivable, inventory, and advances to tobacco suppliers in foreign countries. In addition, we may periodically elect to purchase, redeem, repay, retire, or cancel indebtedness prior to stated maturity under our various foreign credit lines. -62- The following summarizes our sources and uses of our cash flows: Successor Predecessor (in millions) Four months ended December 31, 2020 Five months ended August 31, 2020 Nine months ended December 31, 2019 Operating activities $ (25.5) $ (182.1) $ (387.2) Investing activities 38.1 61.7 119.6 Financing activities (2.9) 63.7 150.0 Effect of exchange rate changes on cash (0.4) 1.6 (5.3) Increase (decrease) in cash, cash equivalents, and restricted cash 9.4 (55.1) (122.8) Cash and cash equivalents at beginning of period 93.1 170.2 192.0 Restricted cash at beginning of period 24.8 2.9 5.8 Cash, cash equivalents, and restricted cash at end of period* $ 127.3 $ 118.0 $ 75.0 * Amounts may not equal column totals due to rounding Net cash used by operating activities decreased on a combined basis for the four months ended December 31, 2020 and the five months ended August 31, 2020 compared to the nine months ended December 31, 2019, primarily due to (excluding non-cash activities) decreased inventory driven by smaller crop sizes in Africa and currency devaluation in Europe and South America. Net cash provided by investing activities decreased on a combined basis for the four months ended December 31, 2020 and the five months ended August 31, 2020 compared to the nine months ended December 31, 2019 primarily due to lower collections on beneficial interests on securitized trade receivables driven by lower tobacco sales and lower qualifying receivables available for sale into the securitization facilities. Net cash provided by financing activities decreased on a combined basis for the four months ended December 31, 2020 and the five months ended August 31, 2020 compared to the nine months ended December 31, 2019 primarily due to lower net proceeds resulting from higher repayments of short-term borrowings and the repayment of the ABL facility in place at the Petition Date, partially offset by proceeds from the DIP Facility and borrowings under the ABL Credit Facility. Fluctuation of the U.S. dollar versus many of the currencies in which we have costs may have an impact on our working capital requirements. We will continue to monitor and hedge foreign currency costs, as needed. Approximately $75.4 million of our outstanding cash balance at December 31, 2020 was held in foreign jurisdictions, which includes approximately $2.9 million held by our legal Canadian cannabis businesses. As a result of our cash needs abroad and legal restrictions with respect to repatriation of the proceeds from operations of our Canadian cannabis subsidiaries, it is our intention to permanently reinvest these funds in foreign jurisdictions regardless of the fact that the cost of repatriation would not have a material financial impact. Debt Financing We continue to finance our business with a combination of short-term and long-term seasonal credit lines, the long-term debt securities described above, advances from customers, and cash from operations when available. Refer to "Note 15. Debt Arrangements" for summary of our short-term and long-term debt. The Company’s subsidiary in Tanzania failed to satisfy a loan-to-value ratio requirement in November and December of 2020 under the TDB Facility Agreement. The failure to satisfy this requirement would have permitted TDB to declare an event of default with respect to the Tanzania subsidiary’s borrowings under its credit facility under the TDB Facility Agreement and demand immediate repayment of that subsidiary’s borrowings, which were approximately $50.4 million at December 31, 2020. TDB entered into a First Amendment and Waiver Letter to the TDB Facility Agreement dated December 30, 2020 (the “TDB Waiver”) in which TDB waived the defaults arising from the Tanzania subsidiary’s failure to comply with this ratio in November and December 2020 and adjusted the required loan-to-value ratio for the Tanzania subsidiary for each month thereafter through June 2021. The existence of these defaults by the Tanzania subsidiary under the TDB Facility Agreement (the “Tanzania Default”) resulted in defaults and events of default arising under the ABL Credit Facility and the Term Loan Credit Facility, which would have permitted the respective lenders thereunder to demand immediate repayment of all amounts outstanding under the respective facility. In December 2020, the required lenders under each of the ABL Credit Facility and the -63- Term Loan Credit Facility entered into agreements with the Company waiving the defaults and events of default arising under the respective facility as a result of the Tanzania Default. We will continue to monitor and, as available, adjust funding sources as needed to enhance and drive various business opportunities. Available credit as of December 31, 2020 was $305.5 million primarily comprised of $293.9 million of foreign seasonal lines of credit (of which $130.0 million of availability under the TDB Facility Agreement includes limits for borrowings for jurisdictions to fund the purchase of tobacco in that jurisdiction), $7.5 million from the ABL Credit Facility, and $3.7 million of availability for letters of credit. We believe that our sources of liquidity will be sufficient to fund our anticipated needs for the next twelve months. No cash dividends were paid to shareholders during the three months ended December 31, 2020. The payment of dividends is restricted under the terms the ABL Credit Agreement, the Term Loan Credit Agreement, and the Indenture. Zimbabwe Currency Considerations The Company often holds Zimbabwe RTGS Dollars necessary for operations within Zimbabwe. RTGS is a local currency equivalent that, as of December 31, 2020, was exchanged at a government specified rate of 82:1 with the U.S. Dollar ("USD"). In order to convert Zimbabwe RTGS Dollars to U.S. Dollars, we must obtain foreign currency resources from the Reserve Bank of Zimbabwe, subject to the monetary and exchange control policy in Zimbabwe. If the foreign exchange restrictions and government-imposed controls become severe, we may have to reassess our ability to control our Zimbabwe subsidiary, Mashonaland Tobacco Company ("MTC"). As of December 31, 2020, MTC has $43.1 million of net assets. Critical Accounting Estimates As of the date of this report, there are no material changes to the critical accounting estimates previously disclosed in Part I, Item 7 "Critical Accounting Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020, except for the following: Application of Fresh Start Reporting We applied FASB ASC 852 in preparing the condensed consolidated financial statements. For periods subsequent to the Chapter 11 filing, ASC 852 requires distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business. Upon the effectiveness of the Plan and the emergence of the Debtors from the Chapter 11 Cases, the Company determined it qualified for fresh start reporting under ASC 852, which resulted in the Company becoming a new entity for financial reporting purposes on the Effective Date. We elected to apply fresh start reporting using a convenience date of August 31, 2020. We evaluated and concluded that the events between August 24, 2020 and August 31, 2020 were not material to our financial reporting on both a quantitative or qualitative basis. In accordance with ASC 852 and the application of fresh start accounting, we allocated our reorganization value to our individual assets based on our estimated fair values in conformity with ASC 805, Business Combinations . The reorganization value represents the fair value of the Successor Company's assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets is reported as goodwill. Refer to “ Note 4. Fresh Start Reporting ” for additional information.