What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-19 compared with 2020-03-12 · 294 added, 195 removed, 263 unchanged (65% of the section changed)

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Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Organizational Structure

We, Turning Point Brands, Inc., are a holding company which owns North Atlantic Trading Company, Inc.

(NATC), and its subsidiaries, Turning Point Brands, LLC (TPLLC), and its subsidiaries, and Turning Point Brands (Canada) Inc.

NATC includes subsidiaries National Tobacco Company, L.P.

(NTC), National Tobacco Finance, LLC (NTFLLC), North Atlantic Operating Company, Inc.

(NAOC), North Atlantic Cigarette Company, Inc.

(NACC), and RBJ Sales, Inc.

TPLLC includes subsidiaries Intrepid Brands, LLC (Intrepid), TPB Beast, LLC (VaporBeast), TPB Shark, LLC, and its subsidiaries (collectively, Vapor Shark), TPB International, LLC and its subsidiaries (collectively, IVG), and Nu-X Ventures, LLC (Nu-X).

We are a leading independent provider of Other Tobacco Products (OTP) in the U.S.

We sell a wide range of products across the OTP spectrum including moist snuff tobacco (MST), loose leaf chewing tobacco, premium cigarette papers, make-your-own (MYO) cigar wraps, cigars, and liquid vapor products;

but, we do not sell cigarettes.

We estimate the OTP industry generated approximately $11.5 billion in manufacturer revenue in 2019.

In contrast to manufactured cigarettes, which have been experiencing declining volumes for decades based on data published by the Alcohol and Tobacco Tax and Trade Bureau (TTB), the OTP industry is demonstrating increased consumer appeal with low to mid-single digit consumer unit growth as reported by Management Science Associates, Inc.

(MSAi), a third-party analytics and informatics company.

Under the leadership of a senior management team with an average of 24 years of experience in the tobacco industry, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

We are a leading manufacturer, marketer and distributor of branded consumer products.

We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag ® and Stoker’s ® to our next generation products to fulfill evolving consumer preferences.

Among other markets, we compete in the alternative smoking accessories and Other Tobacco Products (“OTP”) industries.

The alternative smoking accessories market is a dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S.

and Canada and positively evolving consumer perception and acceptance in North America.

The OTP industry, which consists of non-cigarette tobacco products, exhibited low double-digit consumer unit growth in 2020 as reported by Management Science Associates, Inc.

(“MSAi”), a third-party analytics and information company.

Our three focus segments are led by our core, proprietary brands:

Zig-Zag ® in the Zig-Zag Products segment;

Stoker’s ® along with Beech-Nut ® and Trophy ® in the Stoker’s Products segment;

and Nu-X TM and Solace ® along with our distribution platforms ( Vapor Beast ® , VaporFi ® and Direct Vapor ® ) in the NewGen Products segment.

Our businesses generate solid cash flow which we use to finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position.

We currently ship to approximately 800 distributors with an additional 200 secondary, indirect wholesalers in the U.S.

that carry and sell our products.

Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

We have identified additional growth opportunities in the emerging alternatives market.

In January 2019, we established Nu-X, a new wholly owned subsidiary dedicated to the development, production and sale of alternative products and acquisitions in related spaces.

The creation of Nu-X allows us to leverage our expertise in traditional OTP management to grow our presence in alternative products.

Our management team has extensive experience navigating federal, state and local regulations that are directly applicable to the growing alternatives market.

In July 2019, we acquired the assets of Solace.

Solace is an innovative product development company which established one of the top e-liquid brands and has since grown into a leader in alternative products.

Solace’s legacy and innovation will enhance Nu-X’s strong and nimble development engine.

We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories.

As of December 31, 2020, our products are available in approximately 190,000 U.S.

retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 210,000 points of distribution.

Our sales team targets widespread distribution to all traditional retail channels, including convenience stores, and we have a growing e-commerce business.

To better align with our positioning as a branded consumer products company and to highlight the strength of our focus brands, we have renamed our core business segments from Smoking Products to Zig-Zag Products and Smokeless Products to Stoker’s Products.

Historical financial results are not impacted by the segment name change.

We operate in three segments:

Smokeless products, Smoking products and NewGen products.

In our Smokeless products segment, we (i) manufacture and market moist snuff and (ii) contract for and market loose leaf chewing tobacco products.

In our Smoking products segment, we principally (i) market and distribute cigarette papers, tubes, and related products;

and (ii) market and distribute finished cigars and MYO cigar wraps.

Zig-Zag Products, Stoker’s Products and NewGen Products.

In our Zig-Zag Products segment, we principally market and distribute (i) rolling papers, tubes, and related products;

and (ii) finished cigars and make-your-own (“MYO”) cigar wraps.

In our Stoker’s Products segment, we (i) manufacture and market moist snuff tobacco (“MST”) and (ii) contract for and market loose leaf chewing tobacco products.

In our NewGen Products segment, we (i) market and distribute CBD, liquid vapor products and certain other products without tobacco and/or nicotine;

(ii) distribute a wide assortment of products to non-traditional retail via VaporBeast;

and (iii) market and distribute a wide assortment of products to individual consumers via the VaporFi B2C online platforms.

Refer to the ‘Recent Developments section below for details regarding the Solace acquisition and ReCreation investment.

Our portfolio of brands includes some of the most widely recognized names in the OTP industry, such as Stokers ® in the Smokeless segment, Zig-Zag ® in the Smoking segment, and VaporBeast ® and VaporFi ® in the NewGen segment.

and (iii) market and distribute a wide assortment of products to individual consumers via the VaporFi B2C online platform.

Refer to the ‘Recent Developments’ section below for details regarding the ReCreation Marketing investment.

Our portfolio of brands includes some of the most widely recognized names in the alternative smoking accessories and OTP industries, such as Zig-Zag ® , Stoker’s ® , Vapor Beast ® and VaporFi ® .

The following table sets forth the market share and category rank of our core products and demonstrates their industry positions:

Market Share (1)

Category Rank (1)

Chewing Tobacco

Smokeless Products

#1 discount, #2 overall

Smokeless Products

#4 discount, #6 overall

Cigarette Papers

Smoking Products

Zig-Zag Products

#1 premium, #1 overall

MYO Cigar Wraps

Smoking Products

(1) Market share and category rank data for all products are derived from MSAi data as of 12/31/19.

As of December 31, 2019, our products are available in approximately 185,000 U.S.

retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 210,000 points of distribution.

Zig-Zag Products

Stoker’s Products

#3 discount, #6 overall

Chewing Tobacco

Stoker’s Products

#1 discount, #2 overall

(1) Market share and category rank data for all products are derived from MSAi data 52 weeks endeding 12/26/20.

We subscribe to a sales tracking system from MSAi that records all OTP product shipments (ours as well as those of our competitors) from approximately 900 wholesalers to over 250,000 traditional retail stores in the U.S.

This system enables us to understand individual product share and volume trends across multiple categories down to the individual retail store level, allowing us to allocate field salesforce coverage to the highest opportunity stores.

Our sales and marketing group of approximately 178 professionals utilizes the MSAi system to efficiently target markets and sales channels with the highest sales potential.

Our core tobacco business (Smokeless and Smoking segments) primarily generates revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations.

Our sales and marketing group of approximately 180 professionals utilize the MSAi system to efficiently target markets and sales channels with the highest sales potential.

Our core Zig-Zag Products and Stoker’s Products segments primarily generate revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations.

Our acquisition of VaporBeast in 2016 expanded our revenue streams as we began selling directly to non-traditional retail outlets.

Our acquisition of IVG in 2018 enhanced our business-to-consumer revenue stream with the addition of the Vapor-Fi online platform.

Our acquisition of IVG in 2018 enhanced our B2C revenue stream with the addition of the Vapor-Fi online platform.

The acquisition of Solace provided us with a line of leading liquids and a powerful new product development platform.

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More than 80% of our production, as measured by net sales, is outsourced to suppliers.

The remaining production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky and the proprietary e-liquids operations located in Louisville, Kentucky.

The remaining production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky.

Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products which we produce in-house;

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Cost and increasing regulation of promotional and advertising activities;

• Cost of complying with regulation, including newly passed deeming regulations;

Cost of complying with regulation, including “deeming regulation”;

Counterfeit and other illegal products in our end-markets;

Currency fluctuations;

• Our ability to identify attractive acquisition opportunities in OTP;

Our ability to identify attractive acquisition opportunities;

Our ability to integrate acquisitions.

Recent Developments

Vaping Business Review

The Board of Directors is reviewing strategic alternatives for our third-party vaping distribution business.

We are committed to capitalizing on our core competencies in branding, distribution, product development, and regulatory affairs to create market-leading adult actives products.

This includes investing in the FDA premarket tobacco product application (PMTA) process for our proprietary brands.

However, the expected future returns from third-party vaping distribution may not justify the required investment of human and financial resources going forward.

There can be no assurance that this process will result in the approval or completion of any particular strategic alternative or transaction in the future.

Business for further details.

British American Tobacco (BAT) Partnership

In December 2019, we announced we had executed a binding letter of intent with BATs Canadian subsidiary, its Canadian partner and distributor of Zig-Zag rolling papers (BAT Canada).

The newly executed agreement provides the foundation for accelerated success in the dynamic Canadian marketplace with stronger TPB Zig-Zag rolling paper margins and the ability to complement the traditional Direct-Store-Delivery network of BAT Canada with supplemental distribution in the alternative channels space, including dispensaries, through our recently established partnership with ReCreation Marketing.

Our first Zig-Zag paper purchase order from ReCreation Marketing was received in February 2020.

Share Repurchase Authorization

On February 25, 2020, the TPB board of directors approved a $50 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors including marketing dynamics.

The program will be subject to the ongoing discretion of the board.

COVID-19 Impact

As a result of the extraordinary situation caused by the COVID-19 pandemic, our focus is on the safety and well-being of our colleagues and the communities and customers we serve.

As an organization, we have implemented several changes to enhance safety and mitigate health risk in our work environment.

For our warehouse and manufacturing operations, these include split shifts, temperature scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization.

These changes resulted in higher operational costs related to maintaining a safer work environment and fulfilling orders.

We canceled all unnecessary travel and facilitated telecommuting where possible.

Like many companies, we have changed the way we communicate through increased use of videoconferencing and have implemented tele-selling initiatives through our sales force.

Some of these changes that are proving to be efficient are likely to remain in-place even after the restrictions caused by the pandemic are lifted and will lead to on-going cost savings.

We have also put a hold on new spending commitments as we cautiously manage through this environment.

We hired additional employees in our Louisville facility and implemented temporary wage increases for our hourly employees to meet increased demand.

We shifted production capacity to manufacture hand sanitizers and have donated bottles to hospitals, nursing homes and first responders in our local communities.

COVID-19 may impact our results.

Our third-party cigar wrap manufacturer in the Dominican Republic was temporarily shut down.

Our supply chain has remained operational otherwise.

Select budgeted annual price increases will be delayed.

Our B2C platforms have seen elevated sales levels from consumer shifts to online purchasing, and we gained market share.

We continue to monitor this challenging environment closely and will make necessary adjustments as needed to make sure we are serving our employees and customers, while also protecting the safety of employees and communities.

Durfort Holdings

In June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L.

(“Durfort”) and Blunt Wrap USA for $47.7 million in total consideration, comprised of $37.7 million in cash, including $1.7 million of capitalized transaction costs, and a $10.0 million unsecured subordinated promissory note (“Promissory Note”).

With this transaction, the Company acquired co-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones.

The Company also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap ® cigar wraps within the USA effective October 9, 2020.

Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution.

Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones.

Standard Diversified Inc.

(SDI) Reorganization

On November 18, 2019, our parent company, SDI, announced plans to pursue a corporate reorganization with us.

SDI has indicated that the reorganization is expected to consist of a statutory merger implemented via Delaware law pursuant to which SDI would be merged with a wholly-owned subsidiary of us with us as the survivor of the merger.

Pursuant to the merger, which would be designed to constitute a tax-free downstream reorganization for U.S.

federal income tax purposes, holders of SDI common stock would receive, in turn, for their SDI common stock, shares of our common stock.

We have formed a committee to engage in discussions with SDI, but no decisions have been made.

There can be no assurance that any definitive agreement will be executed or that any transaction will be approved or consummated.

Solace Technologies Acquisition

In July 2019, we purchased the assets of E-Vape 12, Inc and Solace Technologies LLC (Solace) for $9.4 million in total consideration, comprised of $7.7 million in cash and $1.1 million earn-out fair value, and $0.5 million holdback for 18 months, which was adjusted by $0.2 million for a working capital deficiency.

The earn-out consists of 44,295 shares of TPB to be issued to the former owners upon the achievement of certain annual milestones.

Immediately following the acquisition, 88,582 performance based restricted stock with a fair value of $4.62 million were issued to former owners who became employees.

Refer to Note 17 of our Notes to Consolidated Financial Statements for further information.

Solace is an innovative product development company that has grown from the creator of one of the leading vape juice brands in the industry into a leader of alternative ingredients product development.

We intend to incorporate Solaces innovative products as well as the legacy vapor products into our Nu-X Ventures development engine.

In July, 2020, we completed our merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of TPB in a tax-free downstream merger.

Under the terms of the merger, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock.

SDI divested its assets prior to close of the merger such that SDI’s net liabilities at closing were minimal and the only assets that it retained were its remaining TPB Common Stock holdings.

In addition, 244,214 shares of TPB Common Stock were retired in the transaction.

As a result of the transaction, we no longer have a controlling shareholder, our public float of shares outstanding was significantly improved and we eliminated the overhang of a controlling holding company structure.

Premarket Tobacco Applications

We submitted Premarket Tobacco Applications (“PMTAs”) covering 250 products to the FDA prior to the September 9, 2020 filing deadline.

The PMTAs cover a broad assortment of products in the vapor category including multiple proprietary e-liquid offerings in varying nicotine strengths, technologies and sizes;

proprietary replacement parts and components of open system tank devices through partnerships with two leading manufacturers for exclusive distribution of products in the United States;

and a closed system e-cigarette.

Wild Hempettes LLC

On October 1, 2020, we acquired a 20% stake in Wild Hempettes LLC (“Wild Hempettes”), a leading manufacturer of hemp cigarettes under the WildHemp™ and Hempettes™ brands, for $2.5 million.

We have options to increase our stake to a 100% ownership position based on certain milestones.

As part of the transaction, the Wild Hempettes joint venture was spun off from Crown Distributing LLC and formed as a vehicle for us to be the exclusive distributor of Hempettes™ to U.S.

bricks and mortar retailers under a profit-sharing arrangement.

Sale of Vapor Shark Retail Assets

On October 1, 2020, we sold the assets of our remaining seven Vapor Shark retail stores in Oklahoma.

We will receive monthly royalties over the next 4 years as consideration for the assets.

Net sales and gross profit related to these stores were $2.9 million and $1.6 million, respectively, for the year ended December 31, 2020.

On October 26, 2020, we invested $15.0 million in dosist TM , a global cannabinoid company, with an option to invest an additional $15.0 million on pre-determined terms over the next 12 months.

We received a warrant to receive preferred shares of dosist TM that will automatically be exercised upon the changing of federal laws in the United States, rescheduling cannabis and/or permitting the general cultivation, distribution and possession of cannabis.

ReCreation Marketing Investment

In July 2019 we obtained a 30% stake in Canadian distribution entity, ReCreation Marketing (ReCreation).

For $1.0 million paid at closing through our newly created subsidiary, Turning Point Brands (Canada) Inc.

We may invest an additional $2.0 million, if certain performance metrics are achieved, with options to acquire up to a 50% ownership position.

In July 2019 we obtained a 30% stake in Canadian distribution entity, ReCreation Marketing (“ReCreation”) for $1.0 million paid at closing.

In November 2020, we invested an additional $3.0 million increasing our ownership interest to 50%.

We received board seats aligned with our ownership position.

ReCreation Marketing is a specialty marketing and distribution firm focused on building brands in the Canadian smoking, vaping and alternative products categories.

ReCreations management has significant expertise in marketing and distributing tobacco and cannabis products throughout Canada.

We also provided a $2.0 million unsecured loan to ReCreation bearing interest at 8% per annum and maturing November 19, 2022.

The Company has determined that ReCreation is a VIE due its required subordinated financial support.

The Company has determined it is the primary beneficiary due its 50% equity interest, additional subordinated financing and distribution agreement with ReCreation for the sale of the Company’s products.

As a result, the Company began consolidating ReCreation effective November 2020.

ReCreation is a specialty marketing and distribution firm focused on building brands in the Canadian alternative smoking accessories, tobacco and other alternative products categories.

ReCreation’s management has significant expertise in marketing and distributing alternative smoking accessories and tobacco products throughout Canada.

ReCreation’s management and advisory team has over 50 years combined experience building and managing a portfolio of premium brands, all supported by an expert team of sales associates working across Canada to provide service to over 30,000 traditional retail outlets and newly constructed cannabis dispensaries.

Senior Secured Notes and New Revolving Credit Facility

On February 11, 2021, the Company closed a private offering (the “Offering”) of $250 million aggregate principal amount of its 5.625% senior secured notes due 2026 (the “Senior Secured Notes”).

The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026.

The Company used the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 First Lien Term Loan and 2018 First Lien Revolver, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

In connection with the Offering, the Company also entered into a new $25 million senior secured revolving credit facility (the “ New Revolving Credit Facility”).

The Company did not draw any borrowings under the New Revolving Credit Facility on the effective date of the facility but did have letters of credit of approximately $3.6 million outstanding.

The New Revolving Credit Facility will mature on August 11, 2025 if none of the Company’s Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.

See “—Liquidity and Capital Resources—Long-Term Debt” for additional information.

Critical Accounting Policies and Uses of Estimates

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Actual results could differ from these estimates.

We evaluate our estimates, including those related to revenue recognition, collectability of accounts receivable, inventory valuation and obsolescence, goodwill, intangibles, pension and post-retirement obligations, income taxes, litigation, and contingencies on an ongoing basis.

We evaluate our estimates, including those related to revenue recognition, collectability of accounts receivable, inventory valuation and obsolescence, goodwill, intangibles, income taxes, litigation, and contingencies on an ongoing basis.

We base these estimates on our historical experience and other assumptions we believe are appropriate under the circumstances.

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Revenue Recognition

We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S.

GAAP, on January 1, 2018.

We recognize revenues, which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time our performance obligation is satisfied—at an amount that we expect to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606:

We recognize revenues in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which include excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time our performance obligation is satisfied—at an amount that we expect to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606:

(i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied.

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An additional disaggregation of contract revenue by sales channel can be found within Note 21 as well.

Derivative Instruments

Derivative Instruments – Currency Forward Contracts

We use foreign currency forward contracts to hedge a portion of our exposure to changes in foreign currency exchange rates from time to time.

We account for our forward contracts under the provisions of ASC 815, Derivatives and Hedging.

Under our policy, as amended, we may hedge up to 100% of our anticipated purchases of inventory

in the denominated invoice currency over a forward period not to exceed twelve months.

Under our policy, as amended, we may hedge up to 100% of our anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months.

We may also, from time to time, hedge up to ninety percent of our non-inventory purchases in the denominated invoice currency.

Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date except any hedge ineffectiveness which is recognized currently in income.

Gains and losses on these contracts are transferred from other comprehensive income into net income as the related inventories are received.

Gains and losses on these contracts are transferred from other comprehensive income into inventory as the related inventories are received and are transferred to net income as inventory is sold .

Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized in income currently.

Interest Rate Swaps

Derivative Instruments - Interest Rate Swaps

We enter into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows.

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Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issue’s non-convertible debt borrowing rate.

Accordingly, in accounting for the issuance of the Convertible Senior Notes, we

separated the Convertible Senior Notes into liability and equity components.

Accordingly, in accounting for the issuance of the Convertible Senior Notes, we separated the Convertible Senior Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

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Consolidated Results of Operations Data:

Smokeless products

Smoking products

Zig-Zag products

Stoker’s products

NewGen products

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Cost of sales

Smokeless products

Smoking products

Zig-Zag products

Stoker’s products

NewGen products

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Loss on extinguishment of debt

Net periodic benefit (income) cost, excluding service cost

Net periodic benefit cost (income), excluding service cost

Income before income taxes

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Consolidated net income

Net loss attributable to non-controlling interest

Net income attributable to Turning Point Brands, Inc.

Comparison of Year Ended December 31, 2020, to Year Ended December 31, 2019

For the year ended December 31, 2020, overall net sales increased to $405.1 million from $362.0 million for the year ended December 31, 2019, an increase of $43.1 million or 11.9%.

The increase in net sales was primarily driven by increased sales volume across all segments.

For the year ended December 31, 2020, net sales in the Zig-Zag Products segment increased to $132.8 million from $108.7 million for the year ended December 31, 2019, an increase of $24.1 million or 22.1%.

For the year ended December 31, 2020, Zig-Zag Products volumes increased 19.7%, and price/mix increased 2.4%.

The increase in net sales was primarily related to double digit growth in US papers and wraps, partially offset by a $1.8 million decline in non-focus cigars and MYO pipe.

For the year ended December 31, 2020, net sales in the Stoker’s Products segment increased to $115.9 million from $99.9 million for the year ended December 31, 2019, an increase of $16.0 million or 16.0%.

For the year ended December 31, 2020, Stoker’s Products volume increased 12.0% and price/mix increased 4.0%.

The increase in net sales was primarily driven by the continuing double-digit volume growth of Stoker’s ® MST.

Sales in chewing tobacco products were up mid-single digits as compared to prior year.

MST represented 59% of Stoker’s Products revenue in 2020, up from 54% a year earlier.

For the year ended December 31, 2020, net sales in the NewGen products segment increased to $156.4 million from $153.4 million for the year ended December 31, 2019, an increase of $3.1 million or 2.0%.

The increase in net sales was primarily the result of growth in both the Nu-X and vape distribution businesses.

Gross Profit.

For the year ended December 31, 2020, overall gross profit increased to $189.6 million from $136.7 million for the year ended December 31, 2019, an increase of $52.9 million or 38.7%, due to growth across all segments and $24.2 million of costs in 2019 that did not recur primarily related to inventory reserves.

Consolidated gross profit for the year ended December 31, 2019, included $1.2 million of introductory launch costs and $23.0 million of restructuring costs primarily inventory reserves.

Gross profit as a percentage of net sales increased to 46.8% for the year ended December 31, 2020, from 37.8% for the year ended December 31, 2019.

For the year ended December 31, 2020, gross profit in the Zig-Zag Products segment increased to $78.2 million from $59.4 million for the year ended December 31, 2019, an increase of $18.8 million or 31.7%.

Gross profit as a percentage of net sales increased to 58.9% of net sales for the year ended December 31, 2020, from 54.6% of net sales for the year ended December 31, 2019.

The increase in gross profit as a percentage of net sales is a result of increased US paper sales and increased margin in MYO cigar sales as a result of the Durfort transaction.

For the year ended December 31, 2020, gross profit in the Stoker’s Products segment increased to $61.5 million from $52.3 million for the year ended December 31, 2019, an increase of $9.2 million or 17.6%.

Gross profit as a percentage of net sales increased to 53.0% of net sales for the year ended December 31, 2020, from 52.3% of net sales for the year ended December 31, 2019.

The increase in gross profit as a percentage of net sales is primarily a result of strong incremental margin contribution of MST.

For the year ended December 31, 2020, gross profit in the NewGen products segment increased to $49.9 million from $25.1 million for the year ended December 31, 2019, an increase of $24.9 million or 99.1%.

NewGen gross profit for the year ended December 31, 2019, included $1.2 million of introductory launch costs and $23.2 million of restructuring expenses that did not recur in 2020.

Additionally, the gross profit includes $10.1 million of tariff expenses in 2020 compared to $9.3 million in 2019.

Gross profit as a percentage of net sales increased to 31.9% of net sales for the year ended December 31, 2020, from 16.4% of net sales for the year ended December 31, 2019, primarily due to the impact of the $23.2 million of related write-offs and reserves in 2019 associated with the vape distribution business.

Selling, General and Administrative Expenses .

For the year ended December 31, 2020, selling, general and administrative expenses increased to $125.6 million from $109.9 million for the year ended December 31, 2019, an increase of $15.7 million or 14.3%.

Selling, general, and administrative expenses for the year ended December 31, 2020, included $2.6 million of stock options, restricted stock and incentives expense, $3.1 million of transaction expenses, $0.5 million of restructuring expenses and $14.4 million of expense related to PMTA.

Selling, general, and administrative expenses for the year ended December 31, 2019, included $1.8 million of transaction costs (primarily relating to Solace and ReCreation as well as earnout expense for IVG), $5.0 million of introductory launch costs, $3.2 million of restructuring expenses, and $2.2 million in PMTA expenses.

Interest Expense, net.

For the year ended December 31, 2020, interest expense, on a net basis, increased to $20.2 million from $17.3 million for the year ended December 31, 2019, primarily as a result of the amortization of the debt discount on the Convertible Senior Notes of $7.0 million for the year ended December 31, 2020 compared to $2.9 million for the year ended December 31, 2019.

Investment Income .

For the year ended December 31, 2020, investment income decreased to $0.2 million from $2.6 million for the year ended December 31, 2019, primarily due to the impact of the $2.0 million gain on the CASH investment as a result of marking the investment to fair value in 2019.

See Note 11 Other Assets in the Consolidated Financial Statements for additional information on the CASH investment.

Loss on Extinguishment of Debt.

For the year ended December 31, 2020, there was no loss on extinguishment of debt.

For the year ended December 31, 2019, loss on extinguishment of debt was $1.3 million as the result of paying off the 2018 Second Lien Credit Facility.

Net Periodic Benefit Cost (Income), excluding service cost.

For the year ended December 31, 2020, net periodic cost was $0.9 million primarily as a result of the curtailment from the shutdown of the pension plan.

For the year ended December 31, 2019, net periodic income was $5.0 million primarily due to the gain on the termination of the postretirement plan.

Income Tax Expense.

The Company’s income tax expense was $10.0 million, or 23.3% of income before income taxes, for the year ended December 31, 2020, and included a discrete tax deduction of $3.3 million relating to stock option exercises during the year and a discrete tax benefit of $0.6 million from the shutdown of the pension plan.

The Company’s income tax expense of $2.0 million, or 12.9% of income before income taxes, for the year ended December 31, 2019, was lower than the expected annual effective tax rate as a result of discrete tax benefits of $4.6 million from the exercise of stock options during the year.

Consolidated Net Income .

Due to the factors described above, net income for the year ended December 31, 2020 and 2019, was $33.0 million and $13.8 million, respectively.

Comparison of Year Ended December 31, 2019, to Year Ended December 31, 2018

For the year ended December 31, 2019, overall net sales increased to $362.0 million from $332.7 million for the year ended December 31, 2018, an increase of $29.3 million or 8.8%.

The increase in net sales was primarily driven by Stoker’s MST, Zig-Zag cigar wraps, and Nu-X including the acquisition of Solace in 2019.

For the year ended December 31, 2019, net sales in the Smokeless products segment increased to $99.9 million from $90.0 million for the year ended December 31, 2018, an increase of $9.9 million or 11.0%.

For the year ended December 31, 2019, Smokeless products volume increased 7.3% and price/mix increased 3.7%.

The increase in net sales was primarily driven by the continuing growth of Stokers ® MST partially offset by declines in chewing tobacco attributable to increased competition, our promotional timing, and a continuing segment shift to lower price products.

MST represented 54% of Smokeless revenue in 2019, up from 47% a year earlier.

For the year ended December 31, 2019, net sales in the Smoking products segment decreased to $108.7 million from $111.5 million for the year ended December 31, 2018, a decrease of $2.8 million or 2.5%.

For the year ended December 31, 2019, Smoking products volumes decreased 4.9%, while price/mix increased 2.4%.

For the year ended December 31, 2019, net sales in the Zig-Zag Products segment decreased to $108.7 million from $111.5 million for the year ended December 31, 2018, a decrease of $2.8 million or 2.5%.

For the year ended December 31, 2019, Zig-Zag Products volumes decreased 4.9%, while price/mix increased 2.4%.

The decrease in net sales is primarily due to the delay of Canadian paper orders in the first half of the year as a result of the new packaging regulations in Canada as well as our strategic decision to de-emphasize the low margin cigar and MYO / pipe products businesses.

Cigar and MYO / pipe product sales declined by $2.4 million to $7.2 million in the year ended December 31, 2019.

For the year ended December 31, 2019, net sales in the Stoker’s Products segment increased to $99.9 million from $90.0 million for the year ended December 31, 2018, an increase of $9.9 million or 11.0%.

For the year ended December 31, 2019, Stoker’s Products volume increased 7.3% and price/mix increased 3.7%.

The increase in net sales was primarily driven by the continuing growth of Stoker’s ® MST partially offset by declines in chewing tobacco attributable to increased competition, our promotional timing, and a continuing segment shift to lower price products.

MST represented 54% of Stoker’s Products revenue in 2019, up from 47% a year earlier.

For the year ended December 31, 2019, net sales in the NewGen products segment increased to $153.4 million from $131.1 million for the year ended December 31, 2018, an increase of $22.2 million or 16.9%.

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Gross profit as a percentage of net sales weakened to 37.8% for the year ended December 31, 2019, from 42.9% for the year ended December 31, 2018, primarily due to the aforementioned restructuring expenses, including the inventory reserves and write-off associated with our pivot from third-party vaping products.

For the year ended December 31, 2019, gross profit in the Smokeless products segment increased to $52.3 million from $46.5 million for the year ended December 31, 2018, an increase of $5.8 million or 12.4%.

Smokeless gross profit for the year ended December 31, 2019, included $0.3 million of unfavorable LIFO adjustments and $0.0 million of introductory launch costs compared to $0.1 million and $0.2 million, respectively, for the year ended December 31, 2018.

Gross profit as a percentage of net sales increased to 52.3% of net sales for the year ended December 31, 2019, from 51.6% of net sales for the year ended December 31, 2018 driven by Stoker MST gains.

For the year ended December 31, 2019, gross profit in the Smoking products segment increased to $59.4 million from $57.0 million for the year ended December 31, 2018, an increase of $2.3 million or 4.1%.

Smoking gross profit for the year ended December 31, 2018 included $0.6 million of introductory launch costs and $1.3 million of line rationalization expenses.

For the year ended December 31, 2019, gross profit in the Zig-Zag Products segment increased to $59.4 million from $57.0 million for the year ended December 31, 2018, an increase of $2.3 million or 4.1%.

Zig-Zag Products gross profit for the year ended December 31, 2018 included $0.6 million of introductory launch costs and $1.3 million of line rationalization expenses.

Gross profit as a percentage of net sales increased to 54.6% of net sales for the year ended December 31, 2019, from 51.2% of net sales for the year ended December 31, 2018.

The increase in gross profit as a percentage of net sales is primarily due to declining sales of lower margin, low priority products.

For the year ended December 31, 2019, gross profit in the Stoker’s Products segment increased to $52.3 million from $46.5 million for the year ended December 31, 2018, an increase of $5.8 million or 12.4%.

Stoker’s Products gross profit for the year ended December 31, 2019, included $0.3 million of unfavorable LIFO adjustments and $0.0 million of introductory launch costs compared to $0.1 million and $0.2 million, respectively, for the year ended December 31, 2018.

For the year ended December 31, 2019, gross profit in the NewGen products segment decreased to $25.1 million from $39.0 million for the year ended December 31, 2018, a decrease of $13.9 million or 35.7%.

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For the year ended December 31, 2019, selling, general and administrative expenses increased to $109.9 million from $94.1 million for the year ended December 31, 2018, an increase of $15.8 million or 16.8%.

Selling, general, and administrative expenses for the year ended December 31, 2019, include $1.7 million of expenses relating to the inclusion of our 2019 investment in Solace, $1.8 million of transaction costs (primarily relating to Solace and ReCreation as well as earnout expense for IVG), $5.0 million of introductory launch costs, $3.2 million of restructuring expenses, and $2.2 million in PMTA expenses.

Selling, general, and administrative expenses for the year ended December 31, 2018, include $4.5 million of transaction and strategic initiative costs (primarily relating to IVG and Vapor Supply transaction costs), $0.9 million of company-wide introductory launch costs, and $1.8 million of restructuring costs.

Selling, general, and administrative expenses for the year ended December 31, 2019, included $1.7 million of expenses relating to the inclusion of our 2019 investment in Solace, $1.8 million of transaction costs (primarily relating to Solace and ReCreation as well as earnout expense for IVG), $5.0 million of introductory launch costs, $3.2 million of restructuring expenses, and $2.2 million in PMTA expenses.

Selling, general, and administrative expenses for the year ended December 31, 2018, included $4.5 million of transaction and strategic initiative costs (primarily relating to IVG and Vapor Supply transaction costs), $0.9 million of company-wide introductory launch costs, and $1.8 million of restructuring costs.

Interest Expense, net.

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Income Tax Expense.

The Companys income tax expense of $2.0 million, or 12.9% of income before income taxes, for the year ended December 31, 2019, is lower than the expected annual effective tax rate as a result of discrete tax benefits of $4.6 million from the exercise of stock options during the year.

The Companys income tax expense of $6.3 million, or 19.9% of income before income taxes, for the year ended December 31, 2018, is lower than the expected annual effective tax rate as a result of discrete tax benefits of $5.4 million from the exercise of stock options during the year.

The Company’s income tax expense of $6.3 million, or 19.9% of income before income taxes, for the year ended December 31, 2018, was lower than the expected annual effective tax rate as a result of discrete tax benefits of $5.4 million from the exercise of stock options during the year.

Consolidated Net Income .

Due to the factors described above, net income for the year ended December 31, 2019 and 2018, was $13.8 million and $25.3 million, respectively.

Comparison of Year Ended December 31, 2018, to Year Ended December 31, 2017

For the year ended December 31, 2018, overall net sales increased to $332.7 million from $285.8 million for the year ended December 31, 2017, an increase of $46.9 million or 16.4%.

The increase in net sales was primarily driven by continued VaporBeast momentum and the acquisitions of Vapor Supply and IVG.

For the year ended December 31, 2018, net sales in the Smokeless products segment increased to $90.0 million from $84.6 million for the year ended December 31, 2017, an increase of $5.5 million or 6.5%.

For the year ended December 31, 2018, Smokeless products volume increased 2.6% and price/mix increased 3.9%.

For the year ended December 31, 2018, net sales in the Smoking products segment increased to $111.5 million from $110.0 million for the year ended December 31, 2017, an increase of $1.6 million or 1.4%.

For the year ended December 31, 2018, Smoking products volumes decreased 0.7%, while price/mix decreased 0.7%.

The increase in net sales is primarily due to volume growth for our Zig-Zag ® branded papers and cigar wraps offset by our strategic decision to de-emphasize the low margin cigar products business and line rationalization of our MYO tobacco products.

Cigar product sales declined by $3.0 million to $5.5 million in the year ended December 31, 2018.

For the year ended December 31, 2018, net sales in the NewGen products segment increased to $131.1million from $91.3 million for the year ended December 31, 2017, an increase of $39.9 million or 43.7%.

The increase in net sales was primarily driven by continued VaporBeast momentum along with the acquisitions of Vapor Supply and IVG.

Gross Profit.

For the year ended December 31, 2018, overall gross profit increased to $142.6 million from $125.0 million for the year ended December 31, 2017, an increase of $17.6 million or 14.1%, primarily due to growth in the NewGen segment.

Consolidated gross profit for the year ended December 31, 2018, included $0.1 million of unfavorable LIFO adjustments, $1.0 million of introductory launch costs and $2.9 million of product line rationalizations compared to $1.1 million, $0.7 million and $0.5 million, respectively, in the year ended December 31, 2017.

Gross profit as a percentage of net sales weakened to 42.9% for the year ended December 31, 2018, from 43.7% for the year ended December 31, 2017, primarily due to the majority of the sales growth coming from the NewGen segment, which has lower margins.

For the year ended December 31, 2018, gross profit in the Smokeless products segment increased to $46.5 million from $42.7 million for the year ended December 31, 2017, an increase of $3.8 million or 8.9%.

Smokeless gross profit for the year ended December 31, 2018, included $0.1 million of unfavorable LIFO adjustments, $0.2 million of introductory launch costs, and $0.1 million of restructuring expenses compared to $0.7 million, $0.7 million, and less than $0.1 million, respectively, for the year ended December 31, 2017.

Gross profit as a percentage of net sales increased to 51.6% of net sales for the year ended December 31, 2018, from 50.5% of net sales for the year ended December 31, 2017.

For the year ended December 31, 2018, gross profit in the Smoking products segment decreased to $57.0 million from $57.1 million for the year ended December 31, 2017, a decrease of $0.1 million or 0.2%.

Smoking gross profit for the year ended December 31, 2018, included less than $0.1 million of unfavorable LIFO adjustments, $0.6 million of introductory launch costs, and $1.3 million of restructuring expenses compared to $0.4 million, $0.0, and $0.2 million, respectively, for the year ended December 31, 2017.

Gross profit as a percentage of net sales decreased to 51.2% of net sales for the year ended December 31, 2018, from 52.0% of net sales for the year ended December 31, 2017.

The decrease in gross profit as a percentage of net sales is primarily due to introductory launch costs and restructuring expenses on discontinued products.

For the year ended December 31, 2018, gross profit in the NewGen products segment increased to $39.0 million from $25.1 million for the year ended December 31, 2017, an increase of $13.9 million or 55.4%.

NewGen gross profit for the year ended December 31, 2018, included $0.3 million of introductory launch costs and $1.5 million of restructuring expenses compared to less than $0.1 million, $0.2 million, and $0, respectively, for the year ended December 31, 2017.

Additionally, the Company paid $2.8 million for newly imposed tariffs on goods from outside the United States in 2018, $1.1 million of which was included in cost of goods sold for the year ended December 31, 2018.

Gross profit as a percentage of net sales increased to 29.8% of net sales for the year ended December 31, 2018, from 27.5% of net sales for the year ended December 31, 2017, primarily due to acquisition activity which has resulted in business-to-consumer sales, which generally have higher margins, becoming a larger share of the NewGen segment.

Selling, General and Administrative Expenses .

For the year ended December 31, 2018, selling, general and administrative expenses increased to $94.1 million from $75.3 million for the year ended December 31, 2017, an increase of $18.8 million or 25.0%.

Selling, general, and administrative expenses for the year ended December 31, 2018, include $10.5 million of expenses relating to the inclusion of our 2018 acquisitions IVG and Vapor Supply, $4.5 million of transaction costs (primarily relating to IVG and Vapor Supply) and strategic initiatives, $0.9 million of introductory launch costs, $1.8 million of restructuring costs, and a $2.0 million net reduction to selling, general and administrative expenses related to the VMR Loan.

Selling, general, and administrative expenses for the year ended December 31, 2017, included $2.1 million of transaction and strategic initiative costs, $1.7 million of launch costs, and $0.1 million of restructuring expenses.

Other items leading to the increase in selling, general, and administrative expenses in the year ended December 31, 2018, when compared to the year ended December 31, 2017, include higher legal and litigation expenses associated with our anti-counterfeiting initiative and variable logistics costs associated with increased sales at VaporBeast partially offset by a receivable reserve reversal and prepayment penalty, both of which are associated with the loan issued to a supplier in the second quarter of 2018 that was repaid during the third quarter of 2018.

EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with U.S.

GAAP, we use non-U.S.

GAAP financial measures including EBITDA and Adjusted EBITDA.

We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations.

Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors.

We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance.

In addition, our debt instruments contain covenants which use Adjusted EBITDA calculations.

We define “EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, and amortization.

We define “Adjusted EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of ongoing operating performance.

GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S.

Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S.

GAAP and is subject to inherent limitations.

Other companies in our industry may calculate this non-U.S.

GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure.

The table below provide a reconciliation between net income and Adjusted EBITDA.

(in thousands)

Years ended December 31,

Consolidated net income

Interest expense, net

For the year ended December 31, 2018, interest expense, on a net basis, decreased to $14.8 million from $16.9 million for the year ended December 31, 2017, primarily as a result of lower interest rates from our March 2018 refinancing of our credit facility.

Investment Income .

For the year ended December 31, 2018 and 2017, investment income relating to investments of the MSA escrow deposits was $0.4 million and $0.4 million, respectively.

Loss on extinguishment of debt

For the year ended December 31, 2018, loss on extinguishment of debt was $2.4 million as the result of refinancing our credit facility in the first quarter of 2018.

For the year ended December 31, 2017, loss on extinguishment of debt was $6.1 million as the result of refinancing our credit facility in the first quarter of 2017.

Net Periodic Benefit Cost, excluding service cost.

For the year ended December 31, 2018, net periodic benefit cost, excluding service cost was $0.1 million.

For the year ended December 31, 2017, net periodic benefit cost was $0.2 million.

Income tax expense

The Companys income tax expense of $7.3 million, or 27% of income before income taxes, for the year ended December 31, 2017, is lower than the expected annual effective tax rate as a result of discrete tax benefits of $4.2 million from the exercise of stock options during the year.

Consolidated Net Income .

Due to the factors described above, net income for the year ended December 31, 2018 and 2017, was $25.3 million and $19.7 million, respectively.

Net Loss Attributable to Non-Controlling Interest.

Net loss attributable to non-controlling interest of $0.6 million for the year ended December 31, 2017, is related to Vapor Shark, which was accounted for as a VIE during the second quarter of 2017.

Net Income Attributable to Turning Point Brands, Inc.

Due to the factors described above, net income for the year ended December 31, 2018 and 2017, was $25.3 million and $20.2 million, respectively.

Liquidity and Capital Reserves

Depreciation expense

Amortization expense

Components of Adjusted EBITDA

Stock options, restricted stock, and incentives expense (b)

Transactional expenses and strategic initiatives (c)

New product launch costs (d)

Corporate and vapor restructuring (f)

Vendor settlement (g)

Adjusted EBITDA

(a) Represents LIFO adjustment, non-cash pension expense (income) and foreign exchange hedging.

(b) Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units.

(d) Represents product launch costs for our new product lines.

(e) Represents costs associated with applications related to FDA premarket tobacco product application (“PMTA”).

(f) Represents costs associated with corporate and vapor restructuring including severance and inventory reserves.

Costs during the year ended December 31, 2020 represent the costs from the retirement of a senior executive.

(g) Represents net gain associated with the settlement of a vendor contract.

Liquidity and Capital Resources

Our principal uses for cash are working capital, debt service, and capital expenditures.

We believe our cash flows from operations and borrowing availability under our 2018 Revolving Credit Facility (as defined herein) are adequate to satisfy our operating cash requirements for the foreseeable future.

Our working capital, which we define as current assets less current liabilities, increased $85.3 million to $133.4 million at December 31, 2019, compared with $48.1 million at December 31, 2018.

The increase in working capital is primarily due to the cash proceeds from the issuance of the Convertible Senior Notes.

We believe our cash flows from operations and borrowing availability under our New Revolving Credit Facility are adequate to satisfy our operating cash requirements for the foreseeable future.

Our working capital, which we define as current assets less cash and current liabilities, increased $20.8 million to $58.9 million at December 31, 2020, compared with $38.1 million at December 31, 2019.

The increase in working capital is primarily due to increases in inventory due to increased sales and other current assets.

(in thousands)

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Working capital

During the year ended December 31, 2019, we invested $4.8 million in capital expenditures.

During the year ended December 31, 2020 and 2019, we invested $6.1 million and $4.8 million, respectively, in capital expenditures.

We had unrestricted cash on hand of $41.8 million and $95.3 million as of December 31, 2020 and 2019, respectively.

We had restricted assets of $35.1 million and $32.1 million as of December 31, 2020 and 2019, respectively.

Restricted assets consist of escrow deposits under the MSA.

Restricted assets consist of escrow deposits under the MSA and insurance deposits.

On the 25 th anniversary of each annual deposit, we are entitled to receive reimbursement of the principal amount of escrow remaining for that year.

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Cash Flows from Operating Activities

For the year ended December 31, 2019, net cash provided by operating activities increased to $37.8 million from $13.1 million for the year ended December 31, 2018, an increase of $24.7 million or 189%.

Primarily due to inventory buys in 2018 that reduced cash flow.

For the year ended December 31, 2018, net cash provided by operating activities decreased to $13.1 million from $29.7 million for the year ended December 31, 2017, a decrease of $16.6 million or 56%, primarily due to inventory increases from pre-tariff inventory buys within our existing operations.

For the year ended December 31, 2020, net cash provided by operating activities increased to $43.7 million from $37.8 million for the year ended December 31, 2019, an increase of $5.9 million or 16%, primarily due to higher net income due to increased sales offset by the timing of changes in working capital.

Cash Flows from Investing Activities

For the year ended December 31, 2020, net cash used in investing activities was $64.8 million compared to net cash provided by investing activities of $15.9 million for the year ended December 31, 2019, a decrease of $80.7 million or 508%, primarily due to increases in cash paid for acquisitions and investments in 2020.

For the year ended December 31, 2019, net cash provided by investing activities was $15.9 million compared to cash used in investing activities of $24.7 million for the year ended December 31, 2018, an increase of $40.6 million or 164%, primarily due to the change in MSA escrow deposits from investments to cash holdings as well as lower cash paid for acquisitions.

For the year ended December 31, 2018, net cash used in investing activities increased to $24.7 million from $1.9 million for the year ended December 31, 2017, an increase of $23.6 million or 2110%, primarily due to the Vapor Supply and IVG acquisitions.

Cash Flows from Financing Activities

For the year ended December 31, 2020, net cash used in financing activities was to $29.3 million compared to net cash provided by financing activities $68.0 million for the year ended December 31, 2019, a decrease of $97.3 million or 143%, primarily due to lapping the net proceeds from the issuance of the Convertible Senior Notes and the payment of the revolving credit facility and second lien term loan in 2019.

For the year ended December 31, 2019, net cash provided by financing activities increased to $68.0 million from $9.9 million for the year ended December 31, 2018, an increase of $58.0 million or 584%, primarily due to the proceeds from the issuance of the Convertible Senior Notes offset by payments on the 2018 Revolving Credit Facility, the 2018 Second Lien Credit Facility and payment for the call options.

For the year ended December 31, 2018, net cash provided by financing activities was $9.9 million compared to net cash used in financing activities of $28.0 million for the year ended December 31, 2017, an increase of $37.9 million, primarily due to borrowings against our 2018 Revolving Credit Facility to fund our investing activities.

Long-Term Debt

Notes payable and long-term debt consisted of the following at December 31, 2020 and 2019, in order of preference:

2018 Revolving Credit Facility

2018 First Lien Term Loan

2018 Second Lien Term Loan

Convertible Senior Notes

Note payable - Promissory Note

Note payable - Unsecured Loan

Note payable - IVG

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Less debt discount

Less revolving credit facility

Less current maturities

Net notes payable and long-term debt

As noted above under “—Recent Developments—Senior Secured Notes and New Revolving Credit Facility,” on February 11, 2020 the Company completed a comprehensive refinancing transaction pursuant to which the Company issued $250 million of its 5.625% senior secured notes due 2026 and entered into the New Revolving Credit Facility.

The proceeds from the Offering of the Senior Secured Notes were used to (i) to repay all obligations under and terminate the 2018 First Lien Term Loan and 2018 First Lien Revolver, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

Senior Secured Notes

The Senior Secured Notes mature on February 15, 2026 and bear interest at a rate of 5.625% per annum.

Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.

Obligations under the Senior Secured Notes are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (the “Guarantors”) that guarantee any Credit Facility (as defined in the Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”), including the New Revolving Credit Facility, or capital markets debt securities of the Company or Guarantors in excess of $15.0 million.

The Senior Secured Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.

The New Revolving Credit Facility is secured on a pari passu basis with the Senior Secured Notes .

The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium.

Thereafter, the Company may redeem the Senior Secured Notes, in whole or in part, at established redemption prices, plus accrued and unpaid interest, if any.

In addition, on or prior to February 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625%, plus accrued and unpaid interest, if any to the redemption date;

provided, however , that at least 50% of the original aggregate principal amount of the Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remains outstanding.

In addition, at any time and from time to time prior to February 15, 2023, but not more than once in any twelve-month period, the Company may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes at a redemption price (expressed as a percentage of the principal amount thereof) of 103% plus accrued and unpaid interest of the Senior Secured Notes, if any to but not including the redemption date, on the Senior Secured Notes to be redeemed.

If the Company experiences a change of control (as defined in the Senior Secured Notes Indenture), the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest.

The Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to:

(i) grant or incur liens;

(ii) incur, assume or guarantee additional indebtedness;

(iii) sell or otherwise dispose of assets, including capital stock of subsidiaries;

(iv) make certain investments;

(v) pay dividends, make distributions or redeem or repurchase capital stock;

(vi) engage in certain transactions with affiliates;

and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity.

These covenants are subject to a number of limitations and exceptions set forth in the Indenture.

The Indenture provides for customary events of default .

New Revolving Credit Facility

In connection with the Offering of the Senior Secured Notes, the Company entered into the New Revolving Credit Facility with the lenders party thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”).

The New Revolving Credit Facility provides for a revolving line of credit up to $25.0 million.

Letters of credit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit).

The Company has not drawn any borrowings under the New Revolving Credit Facility but does have letters of credit of approximately $3.6 million outstanding under the facility.

The New Revolving Credit Facility will mature on August 11, 2025 if none of the Company’s 2.50% Convertible Senior Notes (the “Convertible Senior Notes”) are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.

Interest is payable on the New Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging).

The Company also has the option borrow at a rate determined by reference to the base rate.

The obligations under the New Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors.

The Company’s and Guarantors’ obligations under the New Revolving Credit Facility are secured on a pari passu basis with the Notes.

The New Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture.

The New Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the New Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the New Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5,000,000) exceeds 35% of the total commitments under the New Revolving Credit Facility.

The New Revolving Credit Agreement provides for customary events of default.

2018 Credit Facility

On March 7, 2018, the Company entered into a $250 million credit facility consisting of a $160 million 2018 First Lien Term Loan with Fifth Third Bank, as administrative agent, and other lenders, and a $50 million 2018 Revolving Credit Facility (collectively, the 2018 First Lien Credit Facility) in addition to a $40 million 2018 Second Lien Term Loan (together with the 2018 First Lien Credit Facility, the 2018 Credit Facility) with Prospect Capital Corporation, as administrative agent, and other lenders.

On March 7, 2018, the Company entered into a $250 million credit facility consisting of a $160 million 2018 First Lien Term Loan and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) , in each case, with Fifth Third Bank, as administrative agent, and other lenders, in addition to a $40 million 2018 Second Lien Term Loan ( the “2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders.

The 2018 Credit Facility retained the $40 million accordion feature of the 2017 Credit Facility.

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The Company incurred a loss on extinguishment of debt of $2.4 million in the first quarter of 2018 as a result of the refinancing.

The 2018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults.

The 2018 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict the ability of the Company and its subsidiary guarantors:

(i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments.

Refer to Note 23 of Notes to Consolidated Financial Statements for further information regarding dividend restrictions.

2018 First Lien Credit Facility:

The 2018 Credit Facility was repaid in full and terminated with the proceeds of the Offering of the Senior Secured Notes.

The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on our senior leverage ratio.

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The 2018 First Lien Credit Facility has a maturity date of March 7, 2023.

The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of our capital stock, other than certain excluded assets (the Collateral).

In connection with the Senior Notes offering, we entered into a First Amendment (the Amendment) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lending other lending parties thereto.

The Amendment was entered into primarily to permit us to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under our Second Lien Credit Agreement and use the remaining proceeds for acquisitions and investments.

In connection with the Amendment, fees of $0.7 million were incurred.

The 2018 First Lien Credit Facility contains

certain financial covenants, which were amended in connection with the Convertible Senior Notes offering in the third quarter 2019.

The covenants include maximum senior leverage ratio of 3.00x with step-downs to 2.50x, a maximum total leverage ratio of 5.50x with step-downs to 5.00x, and a minimum fixed charge coverage ratio of 1.20x.

In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of October 1, 2019 until September 30, 2020.

Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter 2019.

All parties agreed to waive the payment, resulting in consent fees of $0.1 million.

The weighted average interest rate of the 2018 First Lien Term Loan was 2.9% at December 31, 2020 .

At December 31, 2020 , we had no borrowings outstanding under the 2018 Revolving Credit Facility.

The $50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by letters of credit from Fifth Third Bank totaling $3.7 million, resulting in $46.3 million of availability under the 2018 Revolving Credit Facility at December 31, 2019.

2018 Second Lien Credit Facility:

The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00% and had a maturity date of March 7, 2024.

The 2018 Second Lien Term Loan was secured by a second priority interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan.

The 2018 Second Lien Credit Facility contained certain financial covenants including a maximum senior leverage ratio of 3.75x with step-downs to 3.50x, a maximum total leverage ratio of 4.75x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x.

Based on an excess cash covenant for the facility, a $4.5 million principal payment was made in the second quarter 2019, resulting in $0.2 million loss on extinguishment of debt.

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The equity component is not remeasured as long as it continues to meet the criteria for equity classification.

Interest expense includes $2.9 million of amortization for the year ended December 31, 2019.

Interest expense includes $7.0 million and $2.9 million of amortization for the years ended December 31, 2020 and 2019, respectively.

In accounting for the debt issuance costs related to the issuance of the Convertible Senior Notes, we allocated the total amount incurred to the liability and equity components based on their relative values.

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We paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.

Promissory Note

On June 10, 2020, in connection with the acquisition of certain Durfort assets, we issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of $10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020.

The Principal Amount is payable in two $5.0 million installments, with the first installment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition.

The second installment is subject to reduction for certain amounts payable to us as a holdback.

Unsecured Loan

On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”).

On April 17, 2020, National Tobacco Company, L.P., a wholly-owned subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan.

The proceeds of the loan were received on April 27, 2020.

The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.

Note Payable – IVG

In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”).

The IVG Note is $4.0 million principal with 6.0% interest compounding annually and matures on March 5, 2020.

The IVG Note is subject to customary defaults including defaults for nonpayment, nonperformance, any material breach under the purchase agreement, and bankruptcy or insolvency.

The carrying amount of the IVG Note is $4.2 million as of December 31, 2019.

The IVG Note has a principal amount of $4.0 million, with an annual interest rate of 6.0% compounding annually and matures on March 5, 2020.

All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018.

The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account pending agreement with the sellers of any indemnification obligations.

Distribution Agreements

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Off-balance Sheet Arrangements

During 2020 , we executed various forward contracts for the purchase of €19.7 million and sale of €21.4 million with maturity dates ranging from December 2020 to November 2021.

At December 31, 2020, we had forward contracts for the purchase of €18.0 million and sale of €19.6 million.

The fair value of the foreign currency contracts are based on quoted market prices and resulted in an asset of $0.4 million included in Other current assets and liability of $0.0 million included in Accrued liabilities at December 31, 2020.

During 2019 we did not execute any forward contracts.

During 2018 we executed various forward contracts, none of which met hedge accounting requirements, for the purchase of €14.5 million with maturity dates ranging from March 2018 to January 2019.

During 2017, we executed no forward contracts.

At December 31, 2019 and 2018, we had forward contracts for the purchase of €0.0 million and €1.5 million, respectively.

The Company had swap contracts for a total notional amount of $70 million at December 31,2019 and 2018.

The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $2.5 million and $0.9 million, respectively, as of December 31, 2019 and 2018, included in other long-term liabilities.

We had interest rate swap contracts for a total notional amount of $70 million at December 31, 2020 and December 31, 2019.

The fair values of the interest rate swap contracts are based upon quoted market prices and resulted in a liability of $3.7 million and $2.5 million, respectively, as of December 31, 2020 and December 31, 2019, included in other long-term liabilities.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2019 (in thousands):

The following table summarizes our contractual obligations at December 31, 2020 (in thousands) and does not give effect to the Offering of the Senior Secured Notes or the repayment of the 2018 Credit Facility:

Payments due by period

Less than 1 year

More than 5 years

Long-term debt obligations, including interest

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis