PYXUS INTERNATIONAL, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Readers are cautioned that the statements contained in this report regarding expectations of our performance or other matters that may affect our business, results of operations, or financial condition are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which are based on current expectations of future events, may be identified by the use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “intends,” “projects,” “goals,” “targets,” and other words of similar meaning. These statements also may be identified by the fact that they do not relate strictly to historical or current facts. If underlying assumptions prove inaccurate, or if known or unknown risks or uncertainties materialize, actual results could vary materially from those anticipated, estimated, or projected. These risks and uncertainties include those discussed in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended March 31, 2021 and in our other filings with the Securities and Exchange Commission. These risks and uncertainties include: • risks related to our indebtedness, including that the Company has substantial debt which may adversely affect it by limiting future sources of financing, interfering with its ability to pay interest, and principal on its indebtedness and subjecting it to additional risks, the Company requires a significant amount of cash to service indebtedness and its ability to generate cash depends on many factors beyond its control, the Company may not be able to refinance or renew its indebtedness, including indebtedness due within one year, which may have a material adverse effect on its financial condition, the Company may not be able to satisfy the covenants included in its financing arrangements, which could result in the default of its outstanding debt obligations, and despite current indebtedness levels, the Company may still be able to incur substantially more debt, which could exacerbate further the risks associated with its significant leverage; • risks and uncertainties relating to the Chapter 11 Cases and the Company's liquidity and business strategy, including but not limited to: whether the Company’s leaf tobacco customers, farmers and other suppliers might lose confidence in Pyxus as a result of the Chapter 11 Cases or otherwise and may seek to establish alternative commercial relationships, whether, as a result of the Chapter 11 Cases or otherwise, foreign lenders that have provided short-term operating credit lines to fund leaf tobacco operations at the local level may lose confidence in Pyxus and cease to provide such funding, uncertainty and continuing risks associated with the Company’s ability to achieve its goals, which may adversely affect the Company's liquidity, unanticipated developments with respect to liquidity needs and sources of liquidity could result in a deficiency in liquidity, and the Company’s Board of Directors, as reconstituted in connection with the Chapter 11 Cases, may implement further changes in the Company’s business strategy that could affect the scope of its operations, including the countries in which it continues to operate and the business lines that it continues to pursue, and may result in the recognition of restructuring or asset impairment charges; • risk and uncertainties related to the Company’s leaf tobacco operations, including changes in the timing of anticipated shipments, changes in anticipated geographic product sourcing, changes in relevant capital markets affecting the terms and availability of short-term seasonal financing, political instability, currency and interest rate fluctuations, shifts in the global supply and demand position for tobacco products, changes in tax laws and regulations or the interpretation of tax laws and regulations, resolution of tax matters, adverse weather conditions, the impact of disasters or other unusual events affecting international commerce, and changes in costs incurred in supplying products and related services; • risks and uncertainties related to the COVID-19 pandemic, including possible delays in shipments of leaf tobacco, including from the closure or restricted activities at ports or other channels, disruptions to the Company’s operations or the operations of suppliers and customers resulting from restrictions on the ability of employees and others in the supply chain to travel and work, border closures, determinations by Pyxus or shippers to temporarily suspend operations in affected areas, whether the Company’s operations that have been classified as “essential” under various governmental orders restricting business activities will continue to be so classified or, even if so classified, whether site-specific health and safety concerns related to COVID-19 might otherwise require operations at any of our facilities to be halted for some period of time, negative consumer purchasing behavior with respect to the Company’s products or the products of its leaf tobacco customers during periods of government mandates restricting activities imposed in response to the COVID-19 pandemic, and the extent to which the impact of the COVID-19 pandemic on the Company’s operations and the demand for its products may not coincide with impacts experienced in the United States due to the international scope of its operations, including in emerging and other markets in which the Company operates where the timing and severity of COVID-19 outbreaks and the pace of COVID-19 vaccinations and treatments may differ from those in the United States; and • risks and uncertainties related to the Company’s Other Products and Services segment, including that the e-liquids business has a limited operating history, is in a developing market, may not generate the results that the Company anticipates and has needed, and may continue to need, significant investment to fund continued operations and -45- expansion, that its technologies, processes and formulations may become obsolete, that government approvals necessary for the continued sale of certain e-liquids products may not be obtained, the impact of increasing competition, uncertainties with respect to the development of the industry and market, including the level of consumer demand for such products, the potential for product liability claims, uncertainties with respect to the extent of consumer acceptance of the products offered by the e-liquids business, the impact of regulation associated with the e‑liquids business, including the risk of obtaining anticipated regulatory approvals, and risks and uncertainties related to the CCAA Proceeding (as defined below), including whether the remaining sale transaction with respect to the Canadian Cannabis Subsidiaries (as defined below) will be successfully completed within the anticipated time frame or at all and the extent of any recovery, or additional impairment, that Pyxus may recognize with respect to its investment in these subsidiaries. We do not undertake to update any forward-looking statements that we make from time to time. Executive Summary Despite COVID-related shipping constraints that face many industries, the first half of fiscal 2022 reflects improved demand, increased leaf volumes, and improved operational performance. During the second quarter we continued to catch-up from prior-period shipping delays driven by the pandemic and customer shipping instructions. In addition, we continue to monitor the impact of COVID on our Company and our workforce, and adjust our operations to protect the health and safety of our employees while maintaining business continuity. The leaf business continues to be impacted by COVID-related shipping constraints, including vessel and equipment availability, port congestion, and rising freight costs. We are taking proactive steps to mitigate these challenges, including taking steps to accelerate shipments, exploring new ports for product export, and working closely with customers to determine if there are ways to expedite the process flow for their operations. We estimate that between $90 million and $120 million of revenue was delayed from the first half of the year into future quarters due to COVID-related shipping constraints. Despite these challenges, we continue to manage our working capital closely. Consistent with our expectations, inventory at September 30, 2021 decreased $42.3 million or 5.0% to $802.4 million when compared to September 30, 2020. In addition, our uncommitted inventory decreased compared to the prior year. Our customers continue to look for ways to reduce complexity in their supply chains through partnerships with suppliers who support their environmental, social, and governance ("ESG") objectives. The strengthening of our business in a sustainable manner remains a priority as our global team works together to achieve our purpose of growing a better world. Overview 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. We are committed to responsible crop production that 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 through processing and final shipment, our SENTRI SM traceability system provides clear visibility into how products are produced throughout the supply chain, supporting product integrity. 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. Our consolidated operations are managed and reported in nine 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. See " Note 24. Segment Information " to the "Notes to Condensed Consolidated Financial Statements" for additional information. Operating and Reportable Segment Considerations The Company is reevaluating its operating and reportable segments under ASC Topic 280 – Segment Reporting following the effectiveness of the Plan in August 2020, the appointment of a new Board of Directors in fiscal 2021, the outcomes achieved from cost savings initiatives implemented in fiscal 2021, the Company's exit from its industrial hemp, CBD, and Canadian cannabis businesses in 2021, and the impact the COVID-19 pandemic has had on the Company's global operations. These events are changing how the Company is managed and the information used by Management to assess performance and allocate resources. The Company expects to conclude this evaluation during the three months ended December 31, 2021. U.S. Bankruptcy Proceedings On June 15, 2020, 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 -46- (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 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. Accordingly, upon the effectiveness of the Plan the Company, through its subsidiaries, operated all of the businesses operated by Old Pyxus and its subsidiaries immediately prior to the effectiveness of the Plan and the Company is the successor issuer to Old Pyxus. Other than our Chief Executive Officer, our Board of Directors does not include any of the individuals who served as directors of Old Pyxus at the time the Chapter 11 Cases were commenced or at the effectiveness of the Plan. See " Note 3. Emergence from Voluntary Reorganization under Chapter 11 " to the "Notes to Condensed Consolidated Financial Statements" for additional information. Development of Businesses Beginning in 2017, we undertook a strategic process designed to diversify the Company's products and services by leveraging our core strengths in agronomy and traceability. In general, our diversification strategy focused on products that were value-added, required some degree of processing and offered a higher margin potential than our core tobacco leaf business. In support of this strategy, the Company made investments in businesses that focused on e-liquids, industrial hemp/CBD, and legal cannabis in Canada. Following the effectiveness of the Plan and the election of additional members of our Board of Directors in October 2020, our Board of Directors determined to exit the industrial hemp, CBD and Canadian cannabis businesses in light of the Company’s limited capital resources and the continuing capital requirements to develop and expand these early-stage businesses. In December 2020, the Company commenced actions to exit operations of the industrial hemp businesses, including the production and sale of products containing extracts of industrial hemp, including CBD products. The Company’s CBD extraction facility has ceased operations. CCAA Proceeding On January 21, 2021, Figr Norfolk Inc. (“Figr Norfolk”) and Figr Brands, Inc. (“Figr Brands”), which are indirect subsidiaries of the Company, and Canada’s Island Garden Inc. (“Figr East,” and together with Figr Norfolk and Figr Brands, the “Canadian Cannabis Subsidiaries”), which, prior to its sale on June 28, 2021 was an indirect subsidiary 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 Canadian 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. On May 10, 2021, a definitive agreement for the sale of the assets of Figr Norfolk was entered into for an estimated purchase price of Cdn.$5.0 million. On June 10, 2021, the Canadian Court approved the sale agreement. The consummation of the sale under this agreement is subject to approval of the buyers by Health Canada and the satisfaction of certain other conditions. On May 25, 2021, a definitive agreement was entered into with a separate buyer for the sale of the outstanding equity of Figr East and certain intangible assets of Figr Brands for an estimated aggregate purchase price of Cdn.$24.8 million. On June 10, 2021, the Canadian Court approved the sale agreement. On June 25, 2021, Health Canada approved the buyers of Figr East and certain intangible assets of Figr Brands. The sale of Figr East and certain intangible assets of Figr Brands was completed on June 28, 2021. The amount of recovery that the Company may receive from the pending sale of the assets of Figr Norfolk, the completed sale of the outstanding equity of Figr East, and the completed sale of certain intangible assets of Figr Brands will be impacted by the amount of claims against the Canadian Cannabis Subsidiaries submitted in the CCAA Proceeding, the extent to which such claims are approved by the Canadian Court, and the extent to which the Company's interest in the Canadian Cannabis Subsidiaries are determined by the Canadian Court to be debt claims entitled to recovery on the same basis as other unsecured creditor claims with respect to the Canadian Cannabis Subsidiaries. -47- COVID-19 We continue to monitor the impact of the COVID-19 pandemic on our Company and workforce as well as the impact of COVID-related shipping constraints. The COVID-19 pandemic and government actions implemented to contain further spread of COVID-19 have severely restricted economic activity around the world, and the onset of new variants of COVID-19 threaten to prolong the effects of the pandemic. 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 in certain markets, we currently have adequate supply of products to meet the near-term forecasted demand. In addition, shipping constraints have resulted in delays in shipments to customers, which my continue for the remainder of the fiscal year and beyond. Broad economic impacts from the COVID-19 pandemic, including increased unemployment rates and reduced consumer spending in some markets in which we operate, 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 in the markets in which we operate 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. Due to the geographic scope of our operations, including emerging markets, and our sale to customers around the world, our operations and the demand for our products are subject to the impact of the COVID-19 on a global scale. Improving economic conditions in the United States, for example, may not coincide with improvements in our results of operations because of our exposure to the impact of COVID-19 elsewhere in the world, particularly in emerging markets that lack access to adequate COVID-19 vaccines and medical treatments. 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. Fresh Start Reporting The Company applied Financial Accounting Standards Board ASC Topic 852 – Reorganizations in preparing the condensed consolidated financial statements. For periods subsequent to the commencement of the Chapter 11 Cases, 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. Our financial results for the two and five months ended August 31, 2020 are referred to as those of the “Predecessor.” Our financial results for the one month ended September 30, 2020, and for the three and six months ended September 30, 2021 are referred to as those of the “Successor.” Our results of operations as reported in our 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 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" to the "Notes to Condensed Consolidated Financial Statements" for additional information. We do not believe that reviewing the results of these periods 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 period when combined with the Predecessor period provides more meaningful comparisons to other periods 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 tables and discussions below also present the combined results for the three months and six months ended September 30, 2020. The combined results (referenced as “Combined (Non-GAAP)” or “combined”) for the three months and six months ended September 30, 2020 represent the sum of the reported amounts for the Predecessor period July 1, 2020 through August 31, 2020 combined with the Successor period from September 1, 2020 through September 30, 2020 and the Predecessor period from April 1, 2020 through August 31, 2020 combined with the Successor period from September 1, 2020 through September 30, 2020, respectively. These combined results are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations. 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 three and six month periods ended September 30, 2020 are to the comparable U.S. GAAP measures for the respective three and six month periods ended September 30, 2021. -48- Results of Operations Three Months Ended September 30, 2021 and 2020 Successor Predecessor Combined (Non-GAAP) (in millions) Three months ended September 30, 2021 One month ended September 30, 2020 Two months ended August 31, 2020 Three months ended September 30, 2020 Sales and other operating revenues $ 394.2 $ 117.8 $ 184.8 $ 302.6 Cost of goods and services sold 342.1 107.5 159.4 266.9 Gross profit* 52.1 10.4 25.4 35.8 Selling, general, and administrative expenses 37.9 15.7 27.1 42.8 Other (expense) income, net (1.8) (1.9) 1.9 — Restructuring and asset impairment charges 6.9 1.2 0.5 1.7 Operating income (loss)* 5.5 (8.5) (0.4) (8.9) Loss on deconsolidation of subsidiaries 2.5 — — — Interest expense, net 28.5 8.1 14.7 22.8 Reorganization items — — 132.9 132.9 Income tax (benefit) expense (14.1) (10.6) 8.5 (2.1) Income from unconsolidated affiliates 1.3 0.2 1.5 1.7 Net loss attributable to noncontrolling interests (0.3) (0.5) (0.3) (0.8) Net (loss) income attributable to Pyxus International, Inc.* $ (9.7) $ (5.3) $ 111.2 $ 105.9 * Amounts may not equal column totals due to rounding Sales and other operating revenues increased $91.6 million, or 30.3%, to $394.2 million for the three months ended September 30, 2021 from $302.6 million for the combined three months ended September 30, 2020. This increase was due to a 12.2% increase in leaf volume from $82.9 million of shipments delayed by the COVID-19 pandemic and customer shipping instructions from fiscal 2021 into the current quarter and an 18.3% increase in leaf average sales price driven by product mix having a higher concentration of lamina. These increases were partially offset by the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and the decrease in e-liquids revenue related to a general industry slow-down amid evolving regulations. Cost of goods and services sold increased $75.2 million, or 28.2%, to $342.1 million for the three months ended September 30, 2021 from $266.9 million for the combined three months ended September 30, 2020. This increase was mainly due to the increase in sales and other operating revenues. Gross profit as a percent of sales increased to 13.2% for the three months ended September 30, 2021 from 11.8% for the combined three months ended September 30, 2020. This increase was attributable to lower conversion costs per kilo, customer mix, and the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021. This increase was partially offset by foreign currency fluctuations and higher shipping costs. Selling, general, and administrative ("SG&A") expenses decreased $4.9 million, or 11.4%, to $37.9 million for the three months ended September 30, 2021 from $42.8 million for the combined three months ended September 30, 2020. SG&A expenses as a percent of sales decreased to 9.6% for the three months ended September 30, 2021 from 14.1% for the combined three months ended September 30, 2020. These decreases were mainly due to increased sales and other operating revenues, the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021, and savings from fiscal 2021 restructuring initiatives. Restructuring and asset impairment charges increased $5.2 million or 305.9% to $6.9 million for the three months ended September 30, 2021 from $1.7 million for the combined three months ended September 30, 2020 due to the write-off of the Company's remaining industrial hemp CBD extraction equipment and the continued restructuring of certain leaf operations. Interest expense, net increased $5.7 million or 25.0% to $28.5 million for the three months ended September 30, 2021 from $22.8 million for the combined three months ended September 30, 2020 due to the borrowings under the DDTL Facility in the current fiscal year. Reorganization items of $132.9 million were incurred in the prior fiscal year as a result of the Chapter 11 Cases. -49- Leaf - North America Supplemental Information Successor Predecessor Combined (Non-GAAP) (in millions, except per kilo amounts) Three months ended September 30, 2021 One month ended September 30, 2020 Two months ended August 31, 2020 Three months ended September 30, 2020 Kilos sold 12.8 2.9 4.4 7.3 Tobacco sales and other operating revenues: Sales and other operating revenues $ 83.7 $ 17.1 $ 25.3 $ 42.4 Average price per kilo 6.54 5.90 5.75 5.81 Processing and other revenues 6.8 2.9 2.5 5.4 Total sales and other operating revenues 90.5 20.0 27.8 47.8 Tobacco cost of goods sold: Tobacco costs 69.4 13.5 19.4 32.9 Transportation, storage, and other period costs 3.6 1.3 3.0 4.3 Derivative financial instrument and exchange losses (gains) — (0.1) — (0.1) Total tobacco cost of goods sold 73.0 14.7 22.4 37.1 Average cost per kilo 5.70 5.07 5.09 5.08 Processing and other revenues cost of services sold 4.9 2.4 1.7 4.1 Total cost of goods and services sold 77.9 17.1 24.1 41.2 Gross profit 12.6 2.9 3.7 6.6 Selling, general, and administrative expenses 3.5 1.8 2.3 4.1 Other expense, net (0.5) (0.1) (0.2) (0.3) Restructuring and asset impairment charges 0.1 0.1 — 0.1 Operating income $ 8.5 $ 0.9 $ 1.2 $ 2.1 Total sales and other operating revenues increased $42.7 million, or 89.3%, to $90.5 million for the three months ended September 30, 2021 from $47.8 million for the combined three months ended September 30, 2020. This increase was primarily due to 75.3% higher volume from $44.7 million of shipments delayed by the COVID-19 pandemic and customer shipping instructions from fiscal 2021 into the current quarter and a 12.6% increase in average sales price driven by product mix having a higher concentration of lamina. Cost of goods and services sold increased $36.7 million, or 89.1%, to $77.9 million for the three months ended September 30, 2021 from $41.2 million for the combined three months ended September 30, 2020. This increase was mainly due to the increase in total sales and other operating revenues. Gross profit as a percent of sales decreased to 13.9% for the three months ended September 30, 2021 from 13.8% for the combined three months ended September 30, 2020. This decrease was primarily due to customer mix. This decrease was partially offset by lower conversion costs per kilo. SG&A expenses as a percent of sales decreased to 3.9% for the three months ended September 30, 2021 from 8.6% for the combined three months ended September 30, 2020 driven by increased total sales and other operating revenues and savings from fiscal 2021 restructuring initiatives. -50- Leaf - Other Regions Supplemental Information Successor Predecessor Combined (Non-GAAP) (in millions, except per kilo amounts) Three months ended September 30, 2021 One month ended September 30, 2020 Two months ended August 31, 2020 Three months ended September 30, 2020 Kilos sold 73.6 25.7 44.0 69.7 Tobacco sales and other operating revenues: Sales and other operating revenues $ 273.9 $ 89.4 $ 137.6 $ 227.0 Average price per kilo 3.72 3.48 3.13 3.26 Processing and other revenues 26.5 7.6 15.2 22.8 Total sales and other operating revenues 300.4 97.0 152.8 249.8 Tobacco cost of goods sold: Tobacco costs 223.5 72.6 109.2 181.8 Transportation, storage, and other period costs 15.8 5.9 8.4 14.3 Derivative financial instrument and exchange (gains) losses (0.7) 0.4 (0.1) 0.3 Total tobacco cost of goods sold 238.6 78.9 117.5 196.4 Average cost per kilo 3.24 3.07 2.67 2.82 Processing and other revenues cost of services sold 19.6 5.3 12.7 18.0 Total cost of goods and services sold 258.2 84.2 130.2 214.4 Gross profit 42.2 12.8 22.6 35.4 Selling, general, and administrative expenses 30.1 8.4 17.3 25.7 Other (expense) income, net (1.0) 0.6 0.4 1.0 Restructuring and asset impairment charges 1.2 1.1 0.5 1.6 Operating income $ 9.9 $ 3.9 $ 5.2 $ 9.1 Total sales and other operating revenues increased $50.6 million, or 20.3%, to $300.4 million for the three months ended September 30, 2021 from $249.8 million for the combined three months ended September 30, 2020. This increase was due to a 5.6% increase in volume from $38.2 million of shipments delayed by the COVID-19 pandemic and customer shipping instructions from fiscal 2021 into the current quarter and a 14.1% increase in average sales price driven by product mix having a higher concentration of lamina. Cost of goods and services sold increased $43.8 million, or 20.4%, to $258.2 million for the three months ended September 30, 2021 from $214.4 million for the combined three months ended September 30, 2020. This increase was mainly due to the increase in total sales and other operating revenues. Gross profit as a percent of sales was 14.0% for the three months ended September 30, 2021 from 14.2% for the combined three months ended September 30, 2020. This decrease was primarily due to foreign currency fluctuations and higher shipping costs. This decrease was partially offset by lower conversion costs per kilo. SG&A expenses as a percent of sales decreased to 10.0% for the three months ended September 30, 2021 from 10.3% for the combined three months ended September 30, 2020 driven by increased total sales and other operating revenues. -51- Other Products and Services Supplemental Information Successor Predecessor Combined (Non-GAAP) (in millions) Three months ended September 30, 2021 One month ended September 30, 2020 Two months ended August 31, 2020 Three months ended September 30, 2020 Sales and other operating revenues $ 3.3 $ 0.9 $ 4.2 $ 5.1 Cost of goods and services sold 5.9 6.3 5.2 11.5 Gross loss (2.6) (5.4) (1.0) (6.4) Selling, general, and administrative expenses 4.4 5.5 7.4 12.9 Other (expense) income, net (0.3) (2.4) 1.7 (0.7) Restructuring and asset impairment charges 5.6 — — — Operating loss $ (12.9) $ (13.3) $ (6.7) $ (20.0) Sales and other operating revenues decreased $1.8 million, or 35.3%, to $3.3 million for the three months ended September 30, 2021 from $5.1 million for the combined three months ended September 30, 2020. This decrease was primarily due to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and the decrease in e-liquids revenue related to a general industry slow-down amid evolving regulations. Cost of goods and services sold decreased $5.6 million, or 48.7%, to $5.9 million for the three months ended September 30, 2021 from $11.5 million for the combined three months ended September 30, 2020. This decrease was mainly due to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021. Gross loss as a percent of sales decreased to 78.8% for the three months ended September 30, 2021 from 125.5% for the combined three months ended September 30, 2020. This decrease was primarily attributable to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021. SG&A expenses decreased $8.5 million, or 65.9%, to $4.4 million for the three months ended September 30, 2021 from $12.9 million for the combined three months ended September 30, 2020. SG&A expenses as a percent of sales decreased to 133.3% for the three months ended September 30, 2021 from 252.9% for the combined three months ended September 30, 2020. These decreases were mainly due to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and savings from fiscal 2021 restructuring initiatives. Restructuring and asset impairment charges were $5.6 million for the three months ended September 30, 2021 primarily due to the write-off of the Company's remaining industrial hemp CBD extraction equipment. -52- Six Months Ended September 30, 2021 and 2020 Successor Predecessor Combined (Non-GAAP) (in millions) Six months ended September 30, 2021 One month ended September 30, 2020 Five months ended August 31, 2020 Six months ended September 30, 2020 Sales and other operating revenues $ 727.5 $ 117.8 $ 447.6 $ 565.4 Cost of goods and services sold 633.3 107.5 402.6 510.1 Gross profit* 94.2 10.4 45.0 55.4 Selling, general, and administrative expenses 71.8 15.7 87.9 103.6 Other expense, net (1.7) (1.9) (0.5) (2.4) Restructuring and asset impairment charges 7.1 1.2 0.6 1.8 Operating income (loss)* 13.7 (8.5) (44.0) (52.5) Loss on deconsolidation of subsidiaries 2.5 — — — Debt retirement expense — — 0.8 0.8 Interest expense, net 55.3 8.1 45.2 53.3 Reorganization items — — 106.0 106.0 Income tax (benefit) expense (22.6) (10.6) 0.3 (10.3) (Loss) income from unconsolidated affiliates (0.1) 0.2 2.4 2.6 Net loss attributable to noncontrolling interests (0.5) (0.5) (1.0) (1.5) Net (loss) income attributable to Pyxus International, Inc.* $ (21.2) $ (5.3) $ 19.0 $ 13.7 * Amounts may not equal column totals due to rounding Sales and other operating revenues increased $162.1 million or 28.7% to $727.5 million for the six months ended September 30, 2021 from $565.4 million for the combined six months ended September 30, 2020. This increase was due to a 10.6% increase in leaf volume from $160.1 million shipments delayed by the COVID-19 pandemic and customer shipping instructions from fiscal 2021 into the current fiscal year and a 17.8% increase in leaf average selling prices driven by product mix having a higher concentration of lamina. These increases were partially offset by the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and the decrease in e-liquids revenue related to a general industry slow-down amid evolving regulations. Cost of goods and services sold increased $123.2 million or 24.2% to $633.3 million for the six months ended September 30, 2021 from $510.1 million for the combined six months ended September 30, 2020. This increase was mainly due to the increase in total sales and other operating revenues. Gross profit as a percent of sales increased to 12.9% for the six months ended September 30, 2021 from 9.8% for the combined six months ended September 30, 2020. This increase was attributable to lower conversion costs per kilo, customer mix, and the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021. This increase was partially offset by foreign currency fluctuations and higher shipping costs. SG&A expenses decreased $31.8 million or 30.7% to $71.8 million for the six months ended September 30, 2021 from $103.6 million for the combined six months ended September 30, 2020. SG&A expenses as a percent of sales decreased to 9.9% for the six months ended September 30, 2021 from 18.3% for the combined six months ended September 30, 2020. These decreases were driven by increased sales and other operating revenues, the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021, and savings from fiscal 2021 restructuring initiatives. Restructuring and asset impairment charges increased $5.3 million or 294.4% to $7.1 million for the six months ended September 30, 2021 from $1.8 million for the combined six months ended September 30, 2020. This increase was primarily due to the write-off of the Company's remaining industrial hemp CBD extraction equipment and the continued restructuring of certain leaf operations. Interest expense, net increased $2.0 million or 3.8% to $55.3 million for the six months ended September 30, 2021 from $53.3 million for the combined six months ended September 30, 2020. This increase was due to borrowings under the DDTL Facility in the current fiscal year. Reorganization items of $106.0 million were incurred in the prior fiscal year as a result of the Chapter 11 Cases. -53- Leaf - North America Supplemental Information Successor Predecessor Combined (Non-GAAP) (in millions, except per kilo amounts) Six months ended September 30, 2021 One month ended September 30, 2020 Five months ended August 31, 2020 Six months ended September 30, 2020 Kilos sold 20.0 2.9 9.5 12.4 Tobacco sales and other operating revenues: Sales and other operating revenues $ 130.0 $ 17.1 $ 51.2 $ 68.3 Average price per kilo 6.50 5.90 5.39 5.51 Processing and other revenues 10.3 2.9 6.5 9.4 Total sales and other operating revenues 140.3 20.0 57.7 77.7 Tobacco cost of goods sold: Tobacco costs 106.2 13.5 39.3 52.8 Transportation, storage, and other period costs 7.5 1.3 5.6 6.9 Derivative financial instrument and exchange (gains) losses — (0.1) 0.3 0.2 Total tobacco cost of goods sold 113.7 14.7 45.2 59.9 Average cost per kilo 5.69 5.07 4.76 4.83 Processing and other revenues cost of services sold 7.2 2.4 4.4 6.8 Total cost of goods and services sold 120.9 17.1 49.6 66.7 Gross profit 19.4 2.9 8.1 11.0 Selling, general, and administrative expenses 7.4 1.8 7.2 9.0 Other expense, net (0.8) (0.1) (0.5) (0.6) Restructuring and asset impairment charges 0.1 0.1 — 0.1 Operating income $ 11.1 $ 0.9 $ 0.4 $ 1.3 Total sales and other operating revenues increased $62.6 million or 80.6% to $140.3 million for the six months ended September 30, 2021 from $77.7 million for the combined six months ended September 30, 2020. This increase was due to 61.3% higher volume from $57.1 million of shipments delayed by the COVID-19 pandemic and customer shipping instructions from fiscal 2021 into the current fiscal year and an 18.0% increase in average sales price due to product mix having a higher concentration of lamina. Cost of goods and services sold increased $54.2 million or 81.3% to $120.9 million for the six months ended September 30, 2021 from $66.7 million for the combined six months ended September 30, 2020. This increase was mainly due to the increase in total sales and other operating revenues. Gross profit as a percent of sales decreased to 13.8% for the six months ended September 30, 2021 from 14.2% for the combined six months ended September 30, 2020. This decrease was primarily due to customer mix. This decrease was partially offset by lower conversion costs per kilo. SG&A expenses decreased $1.6 million or 17.8% to $7.4 million for the six months ended September 30, 2021 from $9.0 million for the combined six months ended September 30, 2020. SG&A expenses as a percent of sales decreased to 5.3% for the six months ended September 30, 2021 from 11.6% for the combined six months ended September 30, 2020. These decreases were driven by savings from restructuring initiatives. -54- Leaf - Other Regions Supplemental Information Successor Predecessor Combined (Non-GAAP) (in millions, except per kilo amounts) Six months ended September 30, 2021 One month ended September 30, 2020 Five months ended August 31, 2020 Six months ended September 30, 2020 Kilos sold 135.5 25.7 102.5 128.2 Tobacco sales and other operating revenues: Sales and other operating revenues $ 539.4 $ 89.4 $ 355.9 $ 445.3 Average price per kilo 3.98 3.48 3.47 3.47 Processing and other revenues 41.1 7.6 24.6 32.2 Total sales and other operating revenues 580.5 97.0 380.5 477.5 Tobacco cost of goods sold: Tobacco costs 438.5 72.6 292.0 364.6 Transportation, storage, and other period costs 31.3 5.9 16.9 22.8 Derivative financial instrument and exchange losses (gains) 1.4 0.4 (1.6) (1.2) Total tobacco cost of goods sold 471.2 78.9 307.3 386.2 Average cost per kilo 3.48 3.07 3.00 3.01 Processing and other revenues cost of services sold 29.7 5.3 20.0 25.3 Total cost of goods and services sold 500.9 84.2 327.3 411.5 Gross profit 79.6 12.8 53.2 66.0 Selling, general, and administrative expenses 55.5 8.4 54.5 62.9 Other (expense) income, net (0.9) 0.6 0.8 1.4 Restructuring and asset impairment charges 1.4 1.1 0.5 1.6 Operating income (loss) $ 21.8 $ 3.9 $ (1.0) $ 2.9 Total sales and other operating revenues increased $103.0 million or 21.6% to $580.5 million for the six months ended September 30, 2021 from $477.5 million for the combined six months ended September 30, 2020. This increase was due to a 14.7% increase in average sales prices due to product mix having a higher concentration of lamina and a 5.7% increase in volume from $103.1 million shipments delayed by the COVID-19 pandemic and customer shipping instructions from fiscal 2021 into the current fiscal year. Cost of goods and services sold increased $89.4 million or 21.7% to $500.9 million for the six months ended September 30, 2021 from $411.5 million for the combined six months ended September 30, 2020. This increase was mainly due to the increase in total sales and other operating revenues. Gross profit as a percent of sales was 13.7% for the six months ended September 30, 2021 and 13.8% for the combined six months ended September 30, 2020. This decrease was primarily due to foreign currency fluctuations and higher shipping costs. This decrease was offset by lower conversion costs per kilo. SG&A expenses decreased $7.4 million or 11.8% to $55.5 million for the six months ended September 30, 2021 from $62.9 million for the combined six months ended September 30, 2020. SG&A expenses as a percent of sales decreased to 9.6% for the six months ended September 30, 2021 from 13.2% for the combined six months ended September 30, 2020. These decreases were related to the increase in sales and other operating revenues and current year savings from restructuring initiatives. -55- Other Products and Services Supplemental Information Successor Predecessor Combined (Non-GAAP) (in millions, except per kilo amounts) Six months ended September 30, 2021 One month ended September 30, 2020 Five months ended August 31, 2020 Six months ended September 30, 2020 Sales and other operating revenues $ 6.7 $ 0.9 $ 9.4 $ 10.3 Cost of goods and services sold 11.4 6.3 25.7 32.0 Gross loss (4.7) (5.4) (16.3) (21.7) Selling, general, and administrative expenses 9.0 5.5 26.2 31.7 Other expense, net — (2.4) (0.8) (3.2) Restructuring and asset impairment charges 5.6 — — — Operating loss $ (19.3) $ (13.3) $ (43.3) $ (56.6) Sales and other operating revenues decreased $3.6 million or 35.0% to $6.7 million for the six months ended September 30, 2021 from $10.3 million for the combined six months ended September 30, 2020. This decrease was primarily due to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and the decrease in e-liquids revenue related to a general industry slow-down amid evolving regulations. Cost of goods and services sold decreased $20.6 million or 64.4% to $11.4 million for the six months ended September 30, 2021 from $32.0 million for the combined six months ended September 30, 2020. This decrease was mainly due to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and fiscal 2021 inventory write-downs, including inventory write-offs of cannabis and industrial hemp inventory. Gross loss as a percent of sales decreased to (70.1)% for the six months ended September 30, 2021 from (210.7)% for the combined six months ended September 30, 2020. This decrease was mainly due to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and the inventory write-downs described above. SG&A expenses decreased $22.7 million or 71.6% to $9.0 million for the six months ended September 30, 2021 from $31.7 million for the combined six months ended September 30, 2020. SG&A expenses as a percent of sales decreased to 134.3% for the six months ended September 30, 2021 from 307.8% for the combined six months ended September 30, 2020. These decreases were mainly due to the deconsolidation of the Canadian Cannabis Subsidiaries in the fourth quarter of fiscal 2021 and savings from fiscal 2021 restructuring initiatives. Restructuring and asset impairment charges of $5.6 million for the six months ended September 30, 2021 were primarily due to the write-off of the Company's remaining industrial hemp CBD extraction equipment. Liquidity and Capital Resources Overview 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, 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 compared to fiscal year-end. The first three quarters generally represent the peak of our working capital requirements. Although we believe that our sources of liquidity will be sufficient to fund our anticipated operating needs for the next twelve months, we anticipate periods during which our liquidity needs for operations 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. Based on the assumption that COVID-related shipping constraints are moderately resolved during the remainder of the fiscal year, we are projecting to generate sufficient cash flow from operations during the third and fourth quarter of the fiscal year to satisfy the indebtedness under the DDTL Facility. To the extent we are unable to fully satisfy the indebtedness under the DDTL Facility, we may utilize cash flows from operations or cash on-hand to satisfy a portion of the DDTL Facility and refinance the remainder. -56- Working Capital The following summarizes our working capital: Successor (in millions except for current ratio) September 30, 2021 September 30, 2020 March 31, 2021 Cash and cash equivalents $ 127.6 $ 125.6 $ 92.7 Trade and other receivables, net 214.6 166.4 188.4 Inventories and advances to tobacco suppliers 838.6 892.8 771.5 Total current assets 1,275.6 1,281.8 1,122.5 Notes payable to banks 457.7 457.9 372.2 Accounts payable 58.7 56.9 103.5 Advances from customers 19.0 22.0 12.1 Current portion of long-term debt 121.9 — 2.1 Total current liabilities 766.3 670.0 601.7 Current ratio 1.7 to 1 1.9 to 1 1.9 to 1 Working capital 509.3 611.8 520.8 Long-term debt 543.2 550.2 551.2 Stockholders’ equity attributable to Pyxus International, Inc. 226.5 385.3 247.7 Sources and Uses of Cash Our primary sources of liquidity are cash generated from operations, cash collections from our securitized receivables, 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 generally seasonal in nature, normally extending for a term of 180 to 270 days, 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 16. "Debt Arrangements" to the "Notes to Condensed Consolidated Financial Statements" 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. The following summarizes our sources and uses of our cash flows: Successor Predecessor Combined (Non-GAAP) (in millions) Six months ended September 30, 2021 One month ended September 30, 2020 Five months ended August 31, 2020 Six months ended September 30, 2020 Operating activities $ (231.1) $ (16.9) $ (182.1) $ (199.0) Investing activities 80.2 10.0 61.7 71.7 Financing activities 185.5 38.8 63.7 102.5 Effect of exchange rate changes on cash (1.2) (0.6) 1.6 1.0 Increase (decrease) in cash, cash equivalents, and restricted cash* 33.3 31.2 (55.1) (23.9) Cash and cash equivalents at beginning of period 92.7 93.1 170.2 263.3 Restricted cash at beginning of period 5.0 24.8 2.9 27.7 Cash, cash equivalents, and restricted cash at end of period* $ 131.1 $ 149.2 $ 118.0 $ 267.2 * Amounts may not equal column totals due to rounding Net cash used by operating activities increased for the six months ended September 30, 2021 compared to the combined six months ended September 30, 2020, primarily driven by (excluding non-cash activities) higher receivables outstanding in the current period due to increased sales. -57- Net cash provided by investing activities increased for the six months ended September 30, 2021 compared to the combined six months ended September 30, 2020 primarily due to collection of the DIP loan made to the Canadian Cannabis Subsidiaries. Net cash provided by financing activities increased for the six months ended September 30, 2021 compared to the combined six months ended September 30, 2020 primarily due to the borrowings under the DDTL Facility and higher net proceeds from short-term borrowings. Approximately $107.5 million of our outstanding cash balance at September 30, 2021 was held in foreign jurisdictions, certain of which are subject to exchange controls and tax consequences that could limit our ability to fully repatriate these funds. 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. 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. See "Note 16. Debt Arrangements" to the "Notes to Condensed Consolidated Financial Statements" for summary of our short-term and long-term debt. We will continue to monitor and, as available, adjust funding sources as needed to enhance and drive various business opportunities. Available credit as of September 30, 2021 was $189.2 million primarily comprised of $167.0 million of foreign seasonal lines of credit, $18.5 million from the ABL Credit Facility, and $3.3 million of availability for letters of credit. No cash dividends were paid to shareholders during the three months ended September 30, 2021. The payment of dividends is restricted under the terms the ABL Credit Agreement, the Term Loan Credit Agreement, and the Indenture. Critical Accounting Policies and Estimates As of the date of this report, there are no material changes to the critical accounting policies and estimates previously disclosed in Part I, Item 7 "Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2021. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes to our market risk exposures since March 31, 2021. For a discussion of our exposure to market risk, see Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.