Item 1. Business
Item 1. Business
Turning Point Brands, Inc., Overview
Turning Point Brands, Inc. (the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded adult 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 satisfy 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 mid-single-digit consumer unit annualized growth over the three-year period ending 2022 as reported by Management
Science Associates, Inc. (“MSAi”), a third-party analytics and information company. Our three focus segments are led by our proprietary, iconic brands: Zig-Zag ® and CLIPPER® in the Zig-Zag Products segment; Stoker’s ® along with Beech-Nut ® and Trophy ® in the Stoker’s Products segment; and our distribution platforms ( Vapor Beast ® ,
VaporFi ® and Direct
Vapor ® ) in the NewGen
Products (“NewGen”) segment. Our businesses generate solid cash flow which we use to re-invest in our business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We
currently ship to approximately 850 distributors with an additional 300 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 believe there are meaningful opportunities to grow through investing in organic growth, acquisitions and joint ventures across all product categories. As of December 31, 2022, our products were
available in approximately 197,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 217,000 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.
Zig-Zag Products
Our Zig-Zag Products (“Zig-Zag”) segment principally includes rolling papers and make your own (“MYO”) cigar wraps used as smoking accessories. The strength of the Zig-Zag ® brand drives our leadership position in both the rolling papers and MYO cigar wrap markets. Zig-Zag ® is the #1 premium and #1 overall rolling paper in the U.S. with approximately 35% total market share according to MSAi. Management estimates also
indicate that Zig-Zag ® is the #1 brand in the promising Canadian market. Rolling paper operations are
aided by our sourcing relationship with Republic Technology International SAS (“RTI”). See “Distribution and Supply Agreements” for our discussion of the Zig-Zag ® distribution agreement. 1
In MYO cigar wraps, the Zig-Zag ® brand commands a majority of the market and continues to innovate in novel ways through additional product introductions, including our introduction of Zig-Zag ® ‘Rillo sized wraps, which
are similar in size to cigarillos, the most popular and fastest growing type of machine-made cigars. In June 2020, we purchased certain assets from our long-term commercial partner Durfort Holdings S.R.L (‘‘Durfort’’) which included the co-ownership in the intellectual property rights for all of our MYO Homogenized Tobacco Leaf (“HTL”) cigar wraps products. In connection with the transaction, we entered into an exclusive Master Distribution
Agreement to market and sell the original Blunt Wrap ® cigar wraps within the U.S. which was effective October 9, 2020. In late 2021, we
extended our MYO cigar wraps offering with entries into the growing hemp wraps and natural leaf wraps markets.
In July 2019, to extend our reach in Canada, we made a minority investment in Turning Point Brands Canada (formerly ReCreation Marketing) that we increased to a 65% ownership stake by July 2021.
Turning Point Brands Canada is a specialty marketing and distribution firm focused on building brands in the Canadian cannabis accessories, tobacco and alternative products categories. Our majority ownership stake leverages Turning Point Brands
Canada’s significant expertise in marketing and distributing cannabis accessories and tobacco products throughout Canada. The remainder of Turning Point Brands Canada is owned by its management.
In July 2021, we acquired certain assets of Unitabac, LLC (“Unitabac”), a marketer of mass-market cigars. In the acquisition, we acquired a robust portfolio of cigarillo products and all related
intellectual property, including Cigarillo Non-Tip (NT) HTL products and Rolled Leaf and Natural Leaf Cigarillo Products that we can leverage to re-introduce the Zig-Zag ® brand into a large and growing cigarillo market.
In February 2022, we announced an agreement with Flamagas, a renowned lighter manufacturer, for exclusive distribution of CLIPPER® lighters in the U.S. and Canada.
CLIPPER® is the #1 reusable lighter in the world and the #2 overall world lighter brand but currently underrepresented in the U.S. and Canada with significant potential for growth. We aim to use our existing distribution infrastructure to expand
access of CLIPPER® lighters to more retailers and consumers.
1 Brand ranking and market share percentages obtained from MSAi for the 53-week period ended December 31, 2022.
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Since mid-2019, we have been repositioning the business with growth initiatives focused on new product introductions and new channel expansions that are better aligned with the growing market trends.
As a result of those initiatives, we have been successful in changing the growth profile of our Zig-Zag Products segment. The Zig-Zag Products segment accounts for the majority of our operating profit and has become our fastest growing segment.
Stoker’s Products
Our Stoker’s Products (“Stoker’s”) segment includes both moist snuff tobacco (“MST”) and loose-leaf chewing tobacco. Stoker’s ® is our focus brand in both MST and chewing tobacco. In MST, Stoker’s ® remains among the fastest growing brands and holds a 9.2% share in the stores with distribution and a 6.3% share of the total U.S. MST non-pouch market. Stoker’s ® pioneered the large 12 oz. tub packaging format and is manufactured using a proprietary process that we believe results in a superior product.
Starting in 2015, we extended the Stoker’s ® MST franchise to include traditional 1.2 oz. cans to broaden
retail availability. Our proprietary manufacturing process is conducted at our Dresden, Tennessee, plant and packaged in both our Dresden, Tennessee and Louisville, Kentucky facilities. 1
Stoker’s ® chewing tobacco has grown its market share considerably over the
last several years and is presently the #1 discount and #1 overall brand in the industry, with approximately a 28% market share. Our status in the chew market is further strengthened by Beech-Nut ® , the #3 premium brand and #7 overall, as well as Trophy ® , Durango ® , and the five Wind River Brands.
Collectively, the Company is the #2 marketer of chewing tobacco with approximately 34% market share. Our chewing tobacco operations are facilitated through our long-standing relationship with Swedish Match (now
owned by Philip Morris International Inc.) , the manufacturer of our loose-leaf chewing tobaccos. 1
NewGen Products
Our NewGen segment includes our vape distribution business that was built through acquisitions as well as a new product development arm dedicated to the development, production and sale of alternative
products.
Within our vape distribution business, Vapor Beast ® is a leading distributor
of vapor products servicing the non-traditional retail channel. Vapor Beast also operates a B2C e-commerce business with direct sales to consumers nationwide and abroad through the Direct Vapor ® and VaporFi ® brands.
We have also made minority investments to gain exposure to the large and growing cannabinoid market including in Wild Hempettes, Docklight Brands, Inc. and Old Pal Holding Company LLC.
Competitive Strengths
We believe our competitive strengths include the following:
Large, Leading Brands with Significant Scale
We have built a portfolio of leading brands with significant scale that are well recognized by consumers, retailers, and wholesalers. Our Zig-Zag ® and Stoker’s ® brands are each well
established and date back 123 and 83 years, respectively.
•
Zig-Zag ® is the #1 premium and #1 overall rolling paper brand in the U.S., with significant
distribution in Canada as well. Zig-Zag ® is also the #1 MYO cigar wrap brand in the U.S., as measured by MSAi. We
acquired North American rolling papers distribution rights for Zig-Zag ® in 1997. More importantly, we own the Zig-Zag ® tobacco trademark in the U.S. which we leverage for our MYO cigar wraps product. Approximately 42% of our total
2022 Zig-Zag ® branded net sales are under our own Zig-Zag ® marks rather than those we license from RTI under the Distribution and Licensing Agreements described below .
•
Stoker’s ® is among the fastest growing MST brands in the industry and is the #1 loose-leaf
chewing tobacco brand. We manufacture Stoker’s ® MST using only 100% American Leaf, utilizing a proprietary process to
produce what we believe is a superior product. 2
Zig-Zag ® is an iconic brand and has strong, enduring brand recognition among a
wide audience of consumers. CLIPPER® is the #1 reusable lighter in the world and the #2 overall world lighter brand but currently underrepresented in the U.S. and Canada with significant potential for growth. We believe the Stoker’s ® brand is seen as an innovator in both the moist snuff and loose-leaf chewing tobacco markets. Vapor Beast is a powerful distribution engine that allows us to further penetrate non-traditional retail
outlets. IVG provides us direct access to the highly attractive, high margin B2C segment via its flagship Direct Vapor ® and VaporFi ® brands.
1 Brand rankings and market share percentages obtained from MSAi for the 53-week period ended December 31, 2022.
2 Brand ranking and market share percentages obtained from MSAi for the 53-week period ended December 31, 2022.
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Exposure to Growing Cannabinoid Consumption Trends
We believe that the cannabinoid market will expand over the coming years as it becomes increasingly accepted by the public in the U.S. Our product offerings, particularly those in our Zig-Zag Products
segment, are ideally positioned to benefit from continued growth in consumer consumption.
The legal cannabis market in the U.S. is projected to grow from $26.1 billion in 2022 to $44.5 billion by 2027, representing a 11.3% compounded annual growth rate, according to a February 2023 report
of BDSA. With flower being the leading form factor for cannabis consumption among consumers, we believe our product offerings provide us with significant opportunity to expand the retail channels our consumers frequent. A recent Gallup poll showed
nearly seven in ten Americans now support legalizing cannabis nationwide, approximately twice the amount as twenty years ago. As of the end of 2022, 21 U.S. states and the District of Columbia had legalized cannabis for adult recreational use and a
majority of states now allow for comprehensive public medical cannabis programs.
Successful Track Record of New Product Launches and Category Expansions
We have successfully launched new products and entered new product categories by leveraging the strength of our brands and methodically targeting markets which we believe have significant growth
potential:
•
In 2009, we extended the Zig-Zag ® tobacco brand into the MYO cigar wraps market and
captured a 50% market share within the first two years. We are now the market share leader for MYO cigar wraps with approximately a 59% share of the cigar wraps category and 79% of the share of the HTL cigar wraps sub-category. 1 We believe our success was driven by the Zig-Zag ® tobacco branding, which we feel is widely understood by consumers to represent a favorable, customizable experience ideally suited to MYO products. In late 2021, we extended our Zig-Zag ® MYO cigar wraps offering with entries into the growing hemp wraps and natural leaf wraps markets.
•
We extended the Zig-Zag ® brand into hemp rolling papers in 2018 and followed that
with the launch of paper cones in 2019 with both products quickly establishing leading positions in their respective categories.
•
We leveraged the proud legacy and value of the Stoker’s ® brand to introduce a 12 oz.
MST tub, a size that was not offered by any other market participant at the time of introduction. Stoker’s ® MST has
been among the fastest growing moist snuff brands in the industry in terms of pounds sold. While competitors have since introduced larger format tub packaging, the early entry and differentiation of the Stoker’s ® product have firmly established us as the market leader with over 50% of the tub market as of 2022. In 2015, we introduced Stoker’s ® MST in 1.2 oz. cans to further expand retail penetration, particularly in convenience
stores.
•
Vapor Beast quickly established itself as a leading marketer and distributor of liquid vapor products to the non-traditional retail universe which includes headshops, dispensaries, and B2B e-commerce. With
its national footprint, Vapor Beast is leveraging its regional consumer preference insights to drive sales.
•
In 2019, the IVG acquisition, and with its VaporFi B2C marketing engine, offered us the opportunity to leverage the marketing competencies and processes to sell novel proprietary products across multiple
channels and platforms. In addition, the Solace acquisition provided us with a leading line of liquids.
•
In 2019, we introduced Zig-Zag ® paper cones into the market and have grown it into
one of the top brands in the category.
•
In 2021, the acquisition of the Unitabac assets provided a platform to re-introduce the Zig-Zag ® brand into a large and growing cigarillo market.
•
In 2022, we entered the lighter market through an exclusive distribution agreement for CLIPPER® lighters in the U.S and Canada.
We strategically target product categories that we believe demonstrate significant growth potential and for which the value of our brands is likely to have a meaningful impact. We believe that our
track record and existing portfolio of brands provide growth advantages as we continue to evaluate opportunities to extend our product lines and expand into new categories.
E-Commerce Capabilities
With the acquisitions of Vapor Beast and IVG, we established a scaled B2B and B2C e-commerce presence to service the vape market which was enhanced through our acquisition of Solace. We leveraged
those capabilities to build a meaningful B2B and B2C e-commerce business for Zig-Zag ® .
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Extensive Distribution Network and Data Driven Sales Organization
We have taken important steps to enhance our selling and distribution network and consumer marketing capabilities that allow us to grow our business while keeping our capital expenditure requirements
relatively low. We have long-standing relationships in the core convenience store channel and wholesale distribution network with access to more than 217,000 retail outlets in North America. We are also increasing brand presence through
non-traditional channels including headshops, dispensaries, and B2B e-commerce and are expanding our sales team dedicated to these channels. We have added brand dedicated platforms including ZigZag.com to facilitate our e-commerce brand presence as
well as sell on Amazon and other e-commerce sites. Our NewGen B2B business reaches thousands of vape stores and our B2C business has over one million unique customers.
We service our traditional tobacco and vapor customer bases with an experienced sales and marketing organization of approximately 180 professionals who possess in-depth knowledge of the OTP market. We
extensively use data supported by leading technology, enabling our salesforce to analyze changing trends and effectively identify evolving consumer preferences at the store level and efficiently respond. We subscribe to a sales tracking system
provided by MSAi that measures OTP product shipments by all market participants, on a weekly basis, from approximately 600 wholesalers to over 250,000 traditional retail stores in the U.S. This system enables us to understand share and volume
trends across multiple categories at the store level, allowing us to allocate field salesforce coverage to the highest opportunity stores, thereby enhancing the value of new store placements and sales activity. Within our Stoker’s segment, we have
seen a positive correlation between the frequency of store calls by our salesforce and our retail market share.
Asset-light Business Model that Generates Resilient Free Cash Flow
We have a lean, asset-light manufacturing and sourcing model which leverages outsourced supplier relationships and requires low capital expenditures. We believe our asset-light model provides
marketplace flexibility, allows us to achieve favorable margins and generates high free cash flow conversion.
As part of our asset-light operating model, we built long-standing and extensive relationships with leading, high-quality producers from whom we source products including loose-leaf chewing tobacco
and cigarette paper, among others. We do not outsource our MST production as a result of our proprietary manufacturing processes which are substantively different than those of our competitors.
By outsourcing the production of certain products to a select group of suppliers with whom we have strong relationships, we are able to maintain low overhead costs and minimal capital expenditures.
Our supplier relationships allow us to increase the breadth of our product offerings and quickly enter new markets as management is able to focus on brand building and innovation. In 2022, approximately 79% of our net sales were derived from
outsourced production operations and our capital expenditures have ranged between $2.3 million and $7.7 million per year over the previous five years.
The stability of our cash flows is enhanced by the resilience of our Zig-Zag Products and Stoker’s Products business segments which we believe have recession-resistant end-markets. These products are
primarily staples that are small ticket purchases for repeat consumers. In addition, we believe the secular shift to the value category in the Stoker’s Products segment will benefit the long-term resilience of our brands.
Expertise to Succeed in Dynamic Regulatory Environments
We operate in a highly regulated environment involving many different government agencies. In 2009, the U.S. Food and Drug Administration (“FDA”) was given jurisdiction over cigarettes and smokeless
tobacco, which expanded in 2016 to include all other tobacco products including vaping and cigars. This was further expanded in 2022 to cover non-tobacco nicotine products. We believe we have a competitive advantage due to our management team’s
experience navigating the relevant regulatory environment. We have increased our investments in teams of professionals including regulatory lawyers, scientists, and quality assurance processes to ensure we maintain a competitive advantage in this
area.
The FDA is implementing a premarket review process, referred to as the PMTA, or the Premarket Tobacco Application, process, which requires all tobacco products introduced or changed since 2007 to
submit an application to the FDA and receive marketing authorization prior to entering the market. For products already on the market when these requirements became effective, the FDA required applications for those products to be on file by
certain dates depending on whether the products were originally-regulated under the Family Smoking Prevention Tobacco Control Act (“TCA”), whether they were later “deemed” tobacco products, or whether they contain non-tobacco nicotine and were not
otherwise exempt from the TCA. The PMTA process is a very expensive and resource-intensive process and there are currently hundreds of competitors in the market but very few have the capability and or the resources to get their products
successfully through this process. In the years since, FDA has rejected millions of applications.
To date, we have spent approximately $24 million in order to file and supplement applications covering a broad portfolio of noncombustible products,
including vaping products and novel oral nicotine products. By developing and submitting for FDA marketing authorization a deep suite of noncombustible products and leveraging our distribution platform, we believe that we have the opportunity to
grow as consumers look toward potentially lower-risk product offerings. We believe this is a transformational event for the industry with potential for us to realize substantial benefits over time as the FDA accelerates enforcement thereby,
creating significant barriers for new entrants as well as significant difficulties for existing companies who may not have the ability to comply with these regulatory requirements. See “Risks Related to Legal, Tax and Regulatory Matters” under
“Item 1A Risk Factors” and Note 1, “Organizations and Basis of Presentation” in the notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, for additional information.
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In addition, we have been building and expanding an alternative logistics infrastructure across the U.S. to comply with the Prevent All Cigarette Trafficking Act (“PACT Act”) which was recently
extended to prohibit the use of the U.S. Postal Service to mail e-cigarette and related products directly to consumers and requires other common carriers to obtain adult signature on delivery.
Experienced Management Team
With extensive experience in consumer products, alternative smoking accessories and tobacco markets, our senior management team has enabled us to grow and diversify our business while improving
operational efficiency. Members of management have previous experience at other leading tobacco companies. Given the professional experience of the senior management team we are able to analyze risks and opportunities from a variety of
perspectives. Our senior leadership has embraced a collaborative culture in which the combined experience, analytical rigor, and creativity are leveraged to assess opportunities and deliver products that satisfy consumers’ demands. Our management
team also brings a proven track record of patient and selective capital deployment into value enhancing transactions.
Growth Strategies
We are focused on building sustainable margins, expanding the availability of our products, developing innovative new products, and enhancing overall operating efficiencies with the goal of improving
margins and cash flow. We adopted the following strategies to drive growth in our business and build stockholder value:
Grow Share of Existing Product Lines, Domestically and Internationally
We intend to remain a consumer centric organization with an innovative view and understanding of the alternative smoking accessories and OTP markets. We believe we have strong tailwinds for growth
within our existing product lines. Within our Zig-Zag Products segment, we are benefitting from secular growth trends in the industry, driving market share gains in our traditional convenience store channel and expanding our presence into
non-traditional channels including headshops, dispensaries and e-commerce to drive growth. Within our Stoker’s Products segment, there is ample runway to gain market share driven by same store sales growth and further distribution gains as Stoker’s ® MST continues to be one of the fastest growing brands in the category.
In 2022, less than 10% of our revenues were generated outside of the U.S. Having established a strong infrastructure and negotiated relationships across multiple segments and products, we are pursuing
an international growth strategy to broaden sales and strengthen margins. We believe international sales represent a meaningful growth opportunity. In 2021, we further invested in growth in Canada by increasing our ownership in Turning Point Brands
Canada to 65%. Our goals include expanding our presence in the worldwide OTP industry on a targeted basis. For example, we are expanding Zig-Zag ® ’s retail penetration and product assortment in Canada including distributing CLIPPER® lighters, and
selling our Stoker’s ® MST products in South America, Europe, Asia and Africa.
Expand into Adjacent Categories through Innovation and New Partnerships
We continually evaluate opportunities to expand into adjacent product categories by leveraging our current portfolio and forming new partnerships. We believe there are meaningful opportunities for
growth within the alternative smoking accessories and OTP markets. We maintain a robust product pipeline and plan to strategically introduce new products in attractive, growing markets, both domestically and internationally, with specific focus on
our papers and MYO wraps businesses. In particular, the strength of the Zig-Zag ® brand provides a great platform to introduce
a suite of complementary products similar to our launch and expansion of hemp papers, paper cones, hemp wraps and natural leaf wraps. In 2022, we entered the lighter market through an exclusive distribution agreement for CLIPPER® lighters in the
U.S. and Canada. CLIPPER® is the #1 reusable lighter in the world and the #2 overall world lighter brand but currently underrepresented in the U.S. and Canada with significant potential for growth. As we have done successfully in the past, we will
leverage our existing sales infrastructure to drive distribution of new products and are investing to expand our e-commerce distribution capabilities.
We have identified a number of new opportunities and we intend to leverage our existing brands and partnerships to continue the process of commercializing winning products that satisfy consumer needs.
Accelerate Growth Through National Distribution Network
Our business is built around a powerful sales and distribution infrastructure that currently reaches an estimated 217,000 retail outlets in North America. We have strong presence in independent
convenience stores and now service most of the leading chain accounts. Through our e-commerce platforms we have alternative avenues through which to sell third-party products and an increasing mix of our proprietary products. This strategy allows
new products to be tested with lower risk before we incorporate them into our wider brick and mortar distribution system.
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Combining our different platforms, we have an expansive multi-channel distribution infrastructure that gives us a big competitive advantage when we introduce new products or acquire companies that we
can integrate into our network. We believe our experienced salesforce, expansive distribution network, and leading market analytics put us in a strong position to swiftly execute new product launches in response to evolving consumer and market
preferences.
Strategically Pursue Acquisitions
We believe there are meaningful acquisition opportunities in our fragmented markets. We regularly evaluate acquisition opportunities across our industries. In evaluating acquisition opportunities, our
focus is on identifying acquisitions that would leverage our distribution platform and product offerings or enable category expansion in areas with high growth potential to drive profit generation.
The vast majority of our 2022 U.S. gross profit was derived from sales of products currently regulated by the FDA Center for Tobacco Products. We have significant experience in complying with the FDA
regulatory regime with a compliance infrastructure composed of legal and scientific professionals. We believe many smaller OTP manufacturers currently lack this infrastructure, which is necessary to comply with the broad scope of FDA regulations.
We believe our regulatory compliance infrastructure, combined with our skilled management and strong distribution platform, position us to act as a consolidator within the OTP industry.
We have a strong track record of enhancing our OTP business with strategic and accretive acquisitions. The Company itself was built through acquisitions that were subsequently grown through
distribution gains, market share growth and brand extensions into new product categories. This is a playbook that we have drawn on over time with a consistent track record of success. We acquired the U.S. and Canadian rolling papers distribution
rights for Zig-Zag ® in 1997 and extended our product offerings including our entry into the MYO cigar wraps category in 2009.
Today, Zig-Zag ® is the #1 premium and #1 overall rolling paper and MYO cigar wrap brand in the U.S., as measured by MSAi. In
2003, we acquired the Stoker’s ® brand. We have since built the brand to the #1 position in the chewing tobacco industry while
successfully leveraging the brand’s value through our MST expansion where it remains among the fastest growing MST brands. Subsequent to our initial public offering (“IPO”) in 2016, we completed a series of acquisitions that built the foundation of
our NewGen segment through (i) Vapor Beast, (ii) IVG, and (iii) Solace. Our investment in Turning Point Brands Canada in 2019 is accelerating Zig-Zag ® ’s growth through alternative channel penetration and introducing our proprietary NewGen products
into Canada. In 2020, we acquired certain assets from Durfort including co-ownership of the intellectual property rights for our MYO cigar wraps products. The transaction increased our share of the economics in a MYO cigar wraps business that was
benefitting from secular growth tailwinds and gave us access to a complimentary product in Blunt Wrap ® through an exclusive distribution agreement. Our investments in Wild Hempettes, Docklight and Old Pal
give us increased exposure to the large and growing cannabinoid market. In 2021, we acquired certain assets from Unitabac, providing a platform to re-enter the large and growing cigarillo category.
Raw Materials, Product Supply, and Inventory Management
We source our products through a series of longstanding, highly valued relationships which allow us to conduct our business on an asset-light, distribution-focused basis.
The components of inventories were as follows (in thousands):
December 31,
2022
December 31,
2021
Raw materials and work in process
$
7,283
$
6,936
Leaf tobacco
43,468
35,900
Finished goods - Zig-Zag Products
42,279
25,663
Finished goods - Stoker’s Products
9,667
8,959
Finished goods - NewGen Products
15,431
8,591
Other
1,787
1,558
Inventories
$
119,915
$
87,607
Zig-Zag Products
Pursuant to the Zig-Zag ® distribution agreements, we are
required to purchase from RTI all cigarette papers, cigarette tubes, and cigarette injecting machines that we sell, subject to RTI fulfilling its obligations under the Zig-Zag ® distribution agreements. See “Distribution and Supply Agreements” for a discussion of the Zig-Zag ® distribution agreements. If RTI is unable or unwilling to perform its obligations or ceases its cigarette paper manufacturing operations, in each case, as set forth in the
Distribution Agreements, we may seek third-party suppliers and continue the use of the Zig-Zag ® trademark to market these
products. To ensure we have a steady supply of premium cigarette paper products, as well as cigarette tubes and injectors, RTI is required to maintain, at its expense, a two-month supply of inventory in a bonded, public warehouse in the U.S.
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We obtain our MYO cigar wraps from our supplier in the Dominican Republic. We also obtain our Zig-Zag ® branded cigar products from the Dominican Republic.
Stoker’s Products
We produce our moist snuff and loose-leaf chewing tobaccos from air-cured and fire-cured leaf tobacco, respectively. We utilize recognized suppliers that generally maintain 12- to 24-month supplies of
our various types of tobacco at their facilities. We do not believe we are dependent on any single country or supplier source for tobacco. We generally maintain up to a two-month supply of finished, moist snuff and loose-leaf chewing tobacco on
hand. This supply is maintained at our Louisville, Kentucky, facility and in two regional public warehouses to facilitate distribution.
We also utilize a variety of suppliers for the sourcing of additives used in our smokeless products and for the supply of our packaging materials. Thus, we believe we are not dependent on a single
supplier for these products. There are no current U.S. federal regulations that restrict tobacco flavor additives in smokeless products. The additives that we use are food-grade, generally accepted ingredients.
All of our moist snuff products are manufactured at our facility in Dresden, Tennessee. Packaging occurs at the Dresden, Tennessee, location in addition to the facility in Louisville, Kentucky. All of
our loose-leaf chewing tobacco production is fulfilled through our agreement with Swedish Match. See “Distribution and Supply Agreements” for our discussion of the Swedish Match Manufacturing Agreement.
NewGen Products
We have sourcing relationships that are capable of providing liquid vapor products for other companies’ brands and for producing our own branded product lines in the category. Our acquisitions of
Vapor Beast, IVG and Solace have (i) accelerated our entry into the non-traditional retail channel, where we believe a significant portion of liquid vapor products are sold; (ii) provided enhanced distribution of products; and (iii) established
best-in-class distribution and B2C platforms. Furthermore, we have established a sourcing group in Asia to ensure timely and cost-effective access to marketplace winners and new product launches, while also maximizing margins through thoughtful
logistics strategies.
Distribution and Supply Agreements
The Zig-Zag Distribution and License Agreements
In 1992, we entered into two long-term exclusive distribution agreements with respect to sales of Zig-Zag® cigarette papers, cigarette tubes, and cigarette
injector machines in the U.S. and Canada (collectively, the “Distribution Agreements”). The Distribution Agreements had an initial twenty-year term, which automatically renews for successive twenty-year terms unless terminated in accordance with
the terms of the Distribution Agreements. The Distribution Agreements renewed for their second twenty-year term in November 2012.
Under the Distribution Agreements, we are required to purchase cigarette papers, cigarette tubes, and cigarette injector machines from the licensor; however, our licensor must provide us with
sufficient quantities consistent with specific order-to-delivery timelines outlined in the Distribution Agreements. Our product supply is further protected by additional safeguards, including the right to seek third-party suppliers in certain
circumstances and a two-month safety stock inventory to be kept in the U.S. at the licensor’s expense. The Distribution Agreements also provide shared responsibility for duties, insurance, shipping, and taxes. The import duties and taxes in the
U.S. and Canada are our responsibility, while the licensor is responsible for insurance, export duties, and shipping costs.
Each of the Distribution Agreements contains customary termination provisions, including failure to meet performance obligations, the assignment of the agreement or the consummation of a change of
control, in each case, without consent of the licensor, upon certain material breaches, including our agreement not to promote, directly or indirectly, cigarette paper or cigarette paper booklets of a competitor, or upon our bankruptcy, insolvency,
liquidation, or other similar event. The licensor also may terminate the Distribution Agreements if a competitor acquires a significant amount of our common stock or if one of our significant stockholders acquires a significant amount of one of our
competitors. In the event of a termination, we have agreed that for a period of five years after the termination we will not engage, directly or indirectly, in the manufacturing, selling, distributing, marketing, or otherwise promoting, in the U.S.
and Canada, of cigarette paper or cigarette paper booklets of a competitor without consent. There are certain de minimis exceptions to these provisions. For further details, see ‘‘Item 1A Risk Factors” – We depend on a small number of key
third-party suppliers and producers for our products’’.
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In subsequent years, we entered into two licensing agreements, giving us the exclusive use of the Zig-Zag® brand name for e-cigarettes and related accessories
in the U.S. and for paper cone products in the U.S. and Canada (collectively, the “License Agreements”). Each of the License Agreements terminates if the Distribution Agreements are terminated.
The Distribution Agreements and the License Agreements were initially entered into with Bolloré S.A. (“Bolloré”). In November 2020, Bolloré assigned the Distribution Agreements and the License Agreements to RTI. For
a number of years, RTI has been the outsourced manufacturer of cigarette papers, cigarette tubes, cigarette injector machines and certain other products bearing the Zig-Zag ® name.
Swedish Match Manufacturing Agreement
In 2008, we entered into a manufacturing and distribution agreement with Swedish Match whereby Swedish Match became the exclusive manufacturer of our loose-leaf chewing tobacco. Under the agreement,
production of our loose-leaf chewing tobacco products was completely transitioned to Swedish Match’s plant located in Owensboro, Kentucky, in 2009. We source all of the tobacco Swedish Match uses to manufacture our products along with certain
proprietary flavorings and retain all marketing, design, formula, and trademark rights over our loose-leaf products. We also have the right to approve all product modifications and are solely responsible for decisions related to package design and
branding of the loose-leaf tobacco produced for us. Responsibilities related to process control, manufacturing activities, and inventory management with respect to our loose-leaf products are allocated between us and Swedish Match as specified in
the agreement. We also have rights to monitor production and quality control processes on an ongoing basis.
The agreement had an initial ten-year term and will automatically be renewed for five successive ten-year terms unless either party provides at least 180 days’ notice prior to a renewal term of its
intent to terminate the agreement, or unless otherwise terminated by mutual agreement of the parties in accordance with the provisions of the agreement. If a notice of non-renewal is delivered, the contract will expire two years after the date on
which the agreement would have otherwise been renewed. The terms allow the agreement to be assumed by a buyer, terminated for uncured material breach, or terminated by us subject to a buyout. We also hold a right of first refusal to acquire the
manufacturing plant as well as Swedish Match’s chewing tobacco unit. The agreement was automatically renewed for the first of five 10-year renewal periods in September 2018.
In November 2022, Philip Morris International Inc., acquired Swedish Match.
Production and Quality Control
We primarily outsource our manufacturing and production processes and focus on packaging, marketing, and distribution. We currently manufacture less than 20% of our products as measured by net sales.
Our in-house manufacturing operations are principally limited to (i) the manufacturing of our moist snuff products, which occurs at our facility in Dresden, Tennessee; and (ii) the packaging of our moist snuff products at our facilities in Dresden,
Tennessee and Louisville, Kentucky. Our MST products are processed in-house, rather than outsourced, as a result of our proprietary manufacturing processes which are substantively different than those of our competitors.
We use proprietary production processes and techniques, including strict quality controls. Our quality control group routinely tests the quality of the tobacco, flavorings, application of flavorings,
premium cigarette papers, tubes and injectors, cigars, MYO cigar wraps, liquid vapor products, and packaging materials. We utilize sophisticated quality controls to test and closely monitor the quality of our products. The high quality of our
tobacco products is largely the result of using high-grade tobacco leaf and food-grade flavorings and, on an ongoing basis, analyzing the tobacco cut, flavorings, and moisture content together with strict specifications for sourced products.
Given the importance of contract manufacturing to our business, our quality control group ensures that established, written procedures and standards are adhered to by each of our contract
manufacturers. Responsibilities related to process control, manufacturing activities, quality control, and inventory management with respect to our loose-leaf are allocated between us and Swedish Match under the manufacturing agreement.
Sales and Marketing
We have grown the size and capacity of our salesforce and intend to continue strengthening the organization to advance our ability to deepen and broaden the retail availability of our products and
brands.
As of December 31, 2022, we had a nationwide sales and marketing organization of approximately 180 professionals. Our sales and marketing group focuses on priority markets
and sales channels and seeks to operate with a high level of efficiency. In 2022, our Zig-Zag and Stoker’s Products sales and marketing efforts enabled our products to reach an estimated 217,000 retail outlets in North America and over 850 direct
wholesale customers with an additional 300 secondary, indirect wholesalers in the U.S.
Our Zig-Zag and Stoker’s Products sales efforts are focused on wholesale distributors and retail merchants in the independent and chain convenience store, tobacco outlet, food store, mass
merchandising, drug store, and non-traditional retail channels. For Zig-Zag Products, we have also developed a growing e-commerce business along with a sales team focused on serving alternative channels such as headshops and dispensaries. Our
NewGen sales efforts are focused on alternative channels and winning new stores, increasing our products share and store share and growing the B2C engine to capture a greater share of direct to consumer online sales. We have expanded, and intend to
continue to expand, the sales of our products into previously underdeveloped geographic markets and retail channels. In 2022, we derived more than 90% of our net sales from sales in the U.S., with the remainder primarily from sales in Canada.
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We subscribe to a sales tracking system from MSAi that records all traditional OTP product shipments (ours as well as those of our competitors) from approximately 600 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. Additionally, the ability to select from a range of parameters and to achieve this level of granularity means we can analyze marketplace trends in a timely manner and swiftly evolve our business planning to meet market
opportunities.
We employ marketing activities to grow awareness, trial, and sales including selective trade advertising to expand wholesale availability, point-of-sale advertising and merchandising and permanent and
temporary displays to improve consumer visibility, and social media. We comply with all regulations relating to the marketing of tobacco products, such as directing marketing efforts to adult consumers, and are committed to full legal compliance in
the sales and marketing of our products. To date, we have neither relied upon, nor conducted, any substantial advertising in consumer media for our tobacco products.
For the years ended December 31, 2022, 2021, and 2020, we did not have any customer that accounted for 10% or more of our net sales. Our customers use an open purchase order system to buy our products
and are not obligated to do so pursuant to ongoing contractual obligations. We perform periodic credit evaluations of our customers and generally do not require collateral on trade receivables. Historically, we have not experienced material credit
losses. Sales to customers within our NewGen segment are generally prepaid.
Competition
Many of our competitors are better capitalized than we are and have greater resources, financial and otherwise. We believe our ability to effectively compete and maintain strong market positions in
our principal product lines are due to the high recognition of our brand names, the perceived quality of each of our products, and the efforts of our sales, marketing, and distribution teams. We compete against “big tobacco,” including Altria
Group, Inc. (formerly Philip Morris International Inc.); British American Tobacco p.l.c. (formerly R.J. Reynolds Tobacco Company); Swedish Match (now owned by Philip Morris International Inc.); Swisher International, Inc.; and manufacturers
including U.K. based Imperial Brands, PLC, across our segments. “Big tobacco” has substantial resources and a customer base that has historically demonstrated loyalty to their brands.
Competition in the OTP market is based upon not only brand quality and positioning but also on price, packaging, promotion, and retail availability and visibility. Given the decreasing prevalence of
cigarette consumption, the “big tobacco” companies continue to demonstrate an increased interest and participation in a number of OTP markets.
Zig-Zag Products
Our principal competitors for premium rolling paper sales are Republic Tobacco, L.P. and HBI International. Our major competitors in MYO cigar wraps are Good Times USA, LLC and New Image Global, Inc.
We believe MYO cigar wrap products are used interchangeably with both rolling papers and finished cigar products by many consumers.
Stoker’s Products
Our four principal competitors in the moist snuff category are Swedish Match (acquired in 2022 by Philip Morris International Inc.), the American Snuff Company, LLC (a unit of British American Tobacco
p.l.c.), Swisher International Group, Inc. and U.S. Smokeless Tobacco Company (a division of Altria Group, Inc.). In the loose-leaf chewing tobacco market, our three principal competitors are Swedish Match (acquired in 2022 by Philip Morris
International Inc.), the American Snuff Company, LLC (a unit of British American Tobacco p.l.c.), and Swisher International Group, Inc. We believe moist snuff products are used interchangeably with loose-leaf products by many consumers.
NewGen Products
In the NewGen segment, our competitors are varied as the market is relatively new and highly fragmented. Our direct competitors sell products that are substantially similar to our products through the
same channels in which we sell our liquid vapor products. We compete with these direct competitors for sales through wholesalers and retailers including, but not limited to, vapor stores, national chain stores, tobacco shops, and convenience stores
and in the online direct to consumer environment. As a result of our acquisitions of Vapor Beast, IVG and Solace we now also compete directly with other non-traditional distributors and retailers.
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Patents, Trademarks, and Trade Secrets
We have numerous registered trademarks relating to our products, including: Beech-Nut ® , Trophy ® , Havana Blossom ® , Durango ® , Stoker’s ® , Tequila Sunrise ® , Fred’s Choice ® , Old Hillside ® ,
Our Pride ® , Red Cap ® , Tennessee Chew ® , Big Mountain ® ,
Springfield Standard ® , Snake River ® ,
FRĒ ® , Vapor Beast ® , Vapor Shark ® , DirectVapor ® , VaporFi ®
and South Beach Smoke ® . The registered trademarks, which are significant to our business, expire
periodically and are renewable for additional 10-year terms upon expiration. Flavor and blend formula trade secrets relating to our tobacco products, which are key assets of our businesses, are maintained under strict secrecy.
The Zig-Zag ® trade dress trademark for premium cigarette papers and related
products are owned by RTI and have been exclusively licensed to us in the U.S. and Canada. The Zig-Zag ® trademark for
e-cigarettes is also owned by RTI and has been exclusively licensed to us in the U.S. We own the Zig-Zag ® trademark with
respect to its use in connection with products made with tobacco including, without limitation, cigarettes, cigars, and MYO cigar wraps in the U.S.
Research and Development and Quality Assurance
We have a research and development and quality assurance function that tests raw materials and finished products in order to maintain a high level of product quality and consistency. Research and
development largely bases its new product development efforts on our high-tech data systems. We spent approximately $0.6 million, $1.1 million, and $1.3 million dollars on research and development and quality control efforts for the years ended
December 31, 2022, 2021, and 2020, respectively.
Human Capital
As of March 3, 2023, we employed 413 full-time and part-time employees. None of our employees are represented by unions. We believe we have a positive relationship with our employees.
We believe that our success is driven by our employees. Our human capital strategy, which is developed and overseen by our Chief People Officer (“CPO”), focuses on the health and safety of our employees, development
and retention of current employees, and talent attraction. Our CPO is also responsible for our diversity, equity, and inclusion (“DE&I”) strategies. The CEO and CPO regularly updates the board of directors and its committees on the human
capital management, as well as the implementation of new initiatives.
Health and Safety: Our health and safety programs are designed to address applicable regulations as well as the specific hazards and work
environments of each of our facilities. We regularly conduct safety reviews at each of our locations to ensure compliance with applicable regulations and all policies and procedures. We maintain safety committees that meet regularly to discuss and
address any potential issues in our warehouse and manufacturing facilities. In addition, we conduct quarterly Motor Vehicle Safety trainings and annual Motor Vehicle Records checks for those assigned to company vehicles or who are daily drivers. We
utilize a number of metrics to assess the performance of our health and safety policies, procedures and initiatives, including lost workdays and any recordable or reportable incidents.
TPB Culture Committee: We implemented a Culture Committee in 2021 as a platform to discuss and implement ideas for Turning Point Brands to be the employer of choice. The
committee is comprised of diverse individuals from different departments and geographic locations. The committee’s focus is to recommend and implement best practices in the areas of health and safety, DE&I, employee engagement, talent
development and retention, and community engagement.
Employee Engagement: To assess and improve employee retention and engagement, we implemented a new software system which frequently surveys our workforce to focus our efforts
on maximizing employee engagement and retention. The system is configured to use text messaging, in addition to email notifications to increase the participation of our workforce.
Diversity, Equity and Inclusion: We place a high value on DE&I. As of December 31, 2022, approximately 32% of our workforce was female and 28% of our employees in
managerial roles were female. As of the same date, underrepresented minorities made up approximately 27% of our workforce, with 22% of our managerial roles held by underrepresented minorities.
Training and Talent Development: We provide technical and leadership training to employees at both the officer and non-officer levels. In 2020, the Company developed Turning
Point University, an online training and development tool used by management and employees.
We believe that encouraging continual development for our employees is essential for us to maintain the strength and profitability of the Company, generally, and brands, specifically. The Company posts its openings
internally to allow current employees to apply. In 2022, we had 24 internal promotions within the organization.
Retaining Talent: During the year ended December 31, 2022, our employee turnover rate was 14.9%. To retain
our employees, we believe it is critical to continually focus on ensuring employees are highly engaged and feel valued. We address these retention efforts in a number of ways from formal surveys and quarterly business updates to regular informal
discussions with employees that enable us to listen to, understand and address their concerns.
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Employee Benefits : We offer comprehensive benefit programs to our employees that provides them with, among other things, medical,
dental, and vision healthcare; 401(k) matching contributions; paid parental leave; tuition assistance; paid holidays; and paid vacation time.
Environmental, Social and Governance (“ESG”)
We believe that focusing on our consumers and customers, while proactively and productively addressing the environment, our employees, our community, and society at large, is the key to driving value for all
stakeholders. We recognize that incorporating ESG initiatives into our business strategy enhances our operating principles of winning with accountability, integrity, and responsibility, and will position our company for greater success in the
future. We believe that we will maximize shareholder returns by implementing strategies and establishing goals to address public health concerns, mitigate environmental risks, seek and integrate a diverse range of viewpoints, and display
responsible behaviors to suppliers, customers, members of the organization and most of all to our consumers.
Our Board of Directors voted on March 22, 2021, to add Environmental, Social, and Governance oversight to the Nominating and Governance Committee’s portfolio of responsibilities. In recognition of the committee’s
expanded role, the Nominating and Governance Committee was renamed the Nominating and ESG Committee.
We engaged Nasdaq Corporate Solutions (“NCS”) to provide a comprehensive review of the Company’s ESG program and to provide recommendations based on best practices. The Company continues to implement plans to address
gaps that were identified by NCS.
Public Health
One key aspect of our ESG program, is our distinct focus on our role in public health. We market and sell products intended for adult use only, many containing nicotine. As a result, public health plays a central
role in all of our product initiatives. We believe in, and work diligently to apply, harm reduction principles to all of our products, from development through distribution and marketing. Our vision is built upon the idea that adult consumers, when
presented with responsibly marketed and high-quality options, will, in large part, prefer products with a lower risk profile than others. This idea of moving adult consumers down the continuum of risk is a key driver of our future for sustainable
growth. We intend to accomplish this by developing low-risk alternatives according to good product stewardship and manufacturing principles in order to increase adult consumer availability of and access to high-quality products that deliver
satisfaction but at a lower risk to the user. We will continue to focus our research and development, scientific, policy, and product resources to increase the number of consumers choosing products that are lower risk.
In September 2020 and again in May 2022, we submitted to the FDA PMTA covering a large number of noncombustible products, including both vaping products and novel oral nicotine products. This is an important and
necessary step to allow us to offer adult consumers an extensive portfolio of products that serve as alternatives to combustible cigarettes and satisfy a wide variety of consumer preferences. The filings provide detailed scientific data that we
believe demonstrates that the products are “appropriate for the protection of public health,” as required by law. Studies to support the applications were performed and included pharmacokinetics studies, a likelihood of use study, and a patterns of
use study, in addition to a toxicological review. We also provided a detailed marketing plan to illustrate how we will continue to prevent youth exposure to the products. See “Risks Related to Legal, Tax and
Regulatory Matters” under “Item 1A Risk Factors” of this Annual Report on Form 10-K.
Prevention of Youth Access
Our vision is a world where only adult consumers purchase and use products that are not intended for youth. As a seller of products intended for adult-use only, society demands a higher burden of responsibility from
us, and we are committed to proactively preventing the underage appeal of and access to those products. We are dedicated to the responsible marketing of our adult use products and are fully committed to complying with all applicable laws and
regulations governing them. We target marketing activities to both male and female current nicotine, cannabinoid, and other active consumers that are 21 years of age and older. The marketing of our adult use products does not include content
directed toward minors, including child-oriented images or other themes where such imagery is reasonably understood to resonate with minors. We plan to continue to engage in appropriately targeted marketing activity, consistent with all legal
requirements, industry standards, and best practices.
Preventing youth access and use of our adult-use products is a key to our continued success. All of our adult-use products are intended to be sold to and used by adults 21 years of age and older, and we are proactive
in implementing programs to prevent youth access. For our own online retail (B2C) sales, we display our policies related to age to purchase, battery safety, and shipping restrictions. Additionally, we verify B2B customers using business licenses in
order to further prevent bulk sales to consumers, which we believe contributes to social sourcing by youth.
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Environmental Stewardship
Being good stewards of the planet will support our business success. Our major areas of focus are lowering vehicle emissions produced by our fleet, incorporating energy savings initiative at our facilities, reducing
water consumption in our operations, and increasing our recycling efforts. Within each of these categories we are concentrating on developing and measuring progress with an aim to define metrics against which we can track our efforts.
Social Impact
We focus our efforts on fostering a diverse and inclusive workforce while providing a safe work environment for our team. We value different perspectives and feel that an open and inclusive culture is not only the
right thing to do, but fundamentally supports the business through diverse thought and opinions. Our DE&I efforts are evidenced through programs like our Women’s Day conversations or our veterans-focused employee resource group. Our goal is
to provide an injury-free workplace where every employee has a safe work environment and feels empowered to speak up. We regularly monitor and provide training as part of our safety program and have active safety committees at each of our sites
dedicated to implementing best practices.
Corporate Governance
Good corporate governance is critical to our operating principles of winning with accountability, integrity, and responsibility. Acting with accountability, integrity and responsibility is at the core of our business
conduct policy. We train all employees on our business conduct policies. In addition, our governance program measures the diversity of our Board. We believe that Board diversity is critical to having a winning culture and strategy. We have
established meaningful measures for our governance program and our targets and actions will allow us to achieve our goals in this area.
2022 Highlights
In 2022, we continued integration of our ESG principles into our business practices. Our ESG committees are comprised of diverse individuals from different departments and geographic locations. The committees report
to the ESG Executive Committee, comprised of the President and CEO, CFO, and General Counsel, who in turn works with the Board’s Nominating and ESG Committee. The following committees were formed and are actively working:
•
The Environmental Committee provides a platform to enhance and track the progress of our environmental practices within our business units. The committee is charged with recommending, implementing, and monitoring best practices in the
areas of carbon emissions, waste, water, and biodiversity within our business units.
•
The Social Committee provides a platform to achieve the objective of being the employer of choice. The committee is charged with recommending and implementing best practices in the areas of health and safety, DE&I, Talent Development
and Retention, and Community Engagement.
•
The Governance Committee provides a platform to assure our governance practices are best in class. The committee is charged with recommending and implementing best practices in the areas of business ethics, political engagement, supply
chain processes, and cybersecurity. The committee additionally is charged with recommending and implementing best practices in the areas of Public Health, Responsible Marketing, and Youth Access Prevention.
Further information related to our ESG program can be found on our website.
Internet Address and Company SEC Filings
Our primary Internet address is www.turningpointbrands.com. The SEC maintains a website at https://www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. On the investor relations portion of our website, www.turningpointbrands.com/investor-relations, we provide a link to our electronic filings
with the U.S. Securities and Exchange Commission (the “SEC”), including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to these reports. We make all such filings available
free of charge as soon as reasonably practicable after filing. The information found on our website is not part of this or any other report we file with or furnish to the SEC.
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