UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2021
OR
For the transition period from_______________ to ________________
Commission file number: 001-37763
TURNING POINT BRANDS, INC.
(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
(502) 778-4421
(Registrant’s telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report: not applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value TPB New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑Yes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☑
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by
check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
As of June 30, 2021, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was approximately $693 million based on such closing sale price of the common stock as reported on the New York Stock Exchange.
At March 4, 2022, there were 18,268,940
shares outstanding of the registrant’s voting common stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 27, 2022,
expected to be filed with the Securities and Exchange Commission on or about March 15, 2022, are incorporated by reference into Part III hereof.
TURNING POINT BRANDS, INC.
TABLE OF CONTENTS
Page No.
PART I
ITEM 1. Business 4
ITEM 1A. Risk Factors 17
ITEM 1B. Unresolved Staff Comments 37
ITEM 2. Properties 37
ITEM 3. Legal Proceedings 37
ITEM 4. Mine Safety Disclosures 37
PART II
ITEM 6. Selected Financial Data 40
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 56
ITEM 8. Financial Statements and Supplementary Data 57
ITEM 9A. Controls and Procedures 100
ITEM 9B. Other Information 101
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance 102
ITEM 11. Executive Compensation 102
ITEM 14. Principal Accountant Fees and Services 102
PART IV
ITEM 15. Exhibits and Financial Statement Schedules 103
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Cautionary Note Regarding Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may generally be identified using words such as
“anticipate,” “believe,” “expect,” “intend,” “plan” and “will” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature,
forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Some, but not all, of these risks are described under Item 1A “Risk Factors” and
elsewhere throughout this Annual Report. As a result, actual events may differ materially from those expressed in or suggested by the forward-looking statements. Any forward-looking statement made by us in this annual report on Form 10-K speaks
only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect it. We have no obligation, and does not intend, to update any forward-looking statements
after the date hereof, except as required by federal securities laws.
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PART I
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
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 mid-single-digit consumer unit annualized growth over the three-year period ending 2021 as reported by Management
Science Associates, Inc. (“MSAi”), a third-party analytics and information company. Our three focus segments are led by our 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 our distribution platforms (Vapor Beast®,
VaporFi® and Direct
Vapor®) along with Solace® in the NewGen Products
segment. Our businesses generate solid cash flow which we use to invest in our business, 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 believe there are meaningful opportunities to grow through investing in organic growth, acquisitions and joint ventures across all product categories. As of December 31, 2021, our products
are available in approximately 195,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 215,000 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 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 overall rolling paper in the U.S. with approximately 34% total market share. 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 further 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. Along with the transaction, we entered into an exclusive Master Distribution Agreement
to market and sell the original Blunt Wrap® cigar wraps within the USA 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 was built up 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, 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 United States and
Canada. CLIPPER is the number one reusable lighter in the world and the number two overall world lighter brand. 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 52-week period ended December 25, 2021.
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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 is now 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 an 8.4% share in the stores with distribution and a 5.6% 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 overall brand in the industry, with approximately a 26% 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 33% market share. Our chewing tobacco operations are facilitated through our long-standing relationship with Swedish Match, the manufacturer of our loose-leaf
chewing tobaccos.1
NewGen Products
Our NewGen Products (“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. International Vapor Group (“IVG”) operates a B2C e-commerce business with direct sales to consumers nationwide and abroad through the Direct
Vapor® and VaporFi® brands. We
are leveraging our vape distribution business to increase sales of our proprietary brands. As part of this strategy to leverage our distribution infrastructure, we acquired Solace in July 2019. Solace is an innovative product development company
which built one of the top e-liquid brands into a leader in alternative products.
We have also made minority investments to gain exposure to the large and growing cannabinoid market including in Wild Hempettes, dosistTM, 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 122 and 82 years, respectively. The NewGen Products segment has been built primarily through the acquisitions of VaporBeast, IVG and Solace, leading sellers of e-liquids, devices, and accessories.
1 Brand rankings and market share percentages obtained from MSAi for the 52-week period ended December 25, 2021.
2 Brand ranking and market share percentages obtained from MSAi for the 52-week period ended December 25, 2021.
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Zig-Zag® is an iconic brand and has strong, enduring brand recognition
among a wide audience of consumers.We believe the Stoker’s® brand is seen as an innovator in both the moist snuff and loose-leaf chewing tobacco markets.
VaporBeast 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 the flagship Direct
Vapor® and VaporFi®
brands. The Solace acquisition provides us with a proven line of e-liquid and a strong new product development platform to launch additional novel products.
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 and NewGen Products segments, are ideally positioned to benefit from continued growth in consumer consumption.
The legal cannabis market in the U.S. is projected to grow from $25 billion in 2021 to $48 billion by 2026, representing a 13% compounded annual growth rate, according to a September 2021
report of BDS Analytics, Inc., providing us with significant opportunity. 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
2021, 18 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:
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 acquisition of VaporBeast and IVG, we established scaled B2B and B2C e-commerce presence to service the vape market. Our e-commerce capabilities were enhanced by the acquisition and
integration of Solace in 2019. 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 215,000 retail outlets in North America. Our NewGen Products B2B business reaches
thousands of vape stores and our B2C business has approximately 1.6 million unique customers. 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 and SolaceVapor.com to facilitate our e-commerce brand presence as well as sell on Amazon.
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 to enable our salesforce to analyze changing trends and effectively identify evolving consumer preferences at the store level. Our market analytics allow us to efficiently and
effectively address evolving consumer and market demands. We subscribe to a sales tracking system provided by MSAi that measures all 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 individual 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 product categories, 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 2021, over 80% of our net sales were derived from
outsourced production operations and our capital expenditures have ranged between $2.0 million and $6.2 million per year over the previous 5 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 FDA was given jurisdiction over cigarettes and smokeless tobacco, which expanded in 2016
to include all other tobacco products including vaping and cigars. We believe we have a competitive advantage due to our management team’s experience navigating the 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 currently implementing a premarket review process, sometimes referred to as the PMTA, or the Pre-market Tobacco Application, process, which required all vape products introduced
since 2007 to submit an application to the FDA by September 2020. 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.
We spent approximately $17 million in order to file applications covering 250 products, and we believe our application was one of the most extensive portfolios for
open tank vaping products that was submitted to the FDA. By developing and submitting for FDA marketing authorization a deep suite of products in the space and leveraging our distribution platform, we believe that we have the opportunity to grow
substantial market share with our proprietary products as our competitors navigate this process. 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” of this Annual Report on Form 10-K.
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In addition, we have been building 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 and requires 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 for growth 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 2021, 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 increased 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®’sretail penetration and product assortment in Canada, 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 through 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. We have an exciting pipeline of new products and SKUs we plan on introducing over the coming years
in both our papers and MYO wraps businesses. In 2022, we will be entering the lighter market through an exclusive distribution agreement for CLIPPER® lighters in the United States and Canada. As we have done successfully in the past, we will
leverage our existing sales infrastructure to drive distribution of these new products and are investing to expand our e-commerce distribution capabilities.
We have identified a number of new adjacencies and we intend to leverage our existing brands and partnerships to continue the process of commercializing winning products that satisfy consumer
needs.
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Increase our Mix of Proprietary Products in Vape Distribution
Our vape distribution business comprises a majority of our revenue with the NewGen Products segment. The NewGen Products segment generates a significant share of our revenue mix but the lowest
share of profits with a sales mix of mostly lower gross margin third-party products. We aim to improve the profitability of the segment by generating increased sales from higher gross margin proprietary products within our vape distribution
platform.
Accelerate Growth Through National Distribution Network
Our business is built around a powerful sales and distribution infrastructure that currently reaches over 215,000 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 and our B2B and B2C vape distribution 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.
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.
The vast majority of our 2021 U.S. gross profit was derived from sales of products currently regulated by 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 we believe 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 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 a strong #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 in the industry. Subsequent to our initial public offering (“IPO”) in 2016, we completed a series of
acquisitions that built the foundation of our NewGen Products segment through (i) VaporBeast, (ii) IVG, and (iii) Solace. Our investment in Turning Point Brands Canada in 2019 is accelerating Zig-Zag®’sgrowth 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, dosistTM, 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):
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Raw materials and work in process $ 6,936 $ 8,137
Finished goods - Stoker’s Products 8,959 9,727
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.
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
Our moist snuff and loose-leaf chewing tobaccos are produced 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 VaporBeast, 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 combining e-commerce selling skills with a national retail salesforce. We believe the VaporBeast B2B competency coupled with the IVG B2C selling strengths and our national retail salesforce is a
genuine competitive advantage and one that we intend to leverage on behalf of our actives products. 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 margin 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.
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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 ‘‘Risk Factors – We depend on a small number
of key third-party suppliers and producers for our products’’.
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. 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.
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.
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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, 2021, 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 2021, our Zig-Zag and Stoker’s Products sales and marketing efforts enabled our products to reach an estimated 215,000 retail outlets in North America and over
800 direct wholesale customers with an additional 200 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. Our NewGen sales efforts are focused on alternative channels and winning new stores, increasing store
share of requirements and growing the B2C engine to capture a greater share of online sales direct to the consumer. We have expanded, and intend to continue to expand, the sales of our products into previously underdeveloped geographic markets
and retail channels. In 2021, we derived more than 90% of our net sales from sales in the U.S., with the remainder primarily from sales in Canada.
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 the consumer media for our tobacco products.
For the years ended December 31, 2021, 2020, and 2019, 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 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); British American Tobacco p.l.c. (formerly R.J. Reynolds Tobacco Company); Swedish Match; 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.
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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, 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, 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 products 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. Through our acquisitions we now also compete directly with other non-traditional distributors and retailers.
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®, 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 $1.1 million, $1.3 million, and $2.5 million dollars on research and development and quality control efforts for the years
ended December 31, 2021, 2020, and 2019, respectively.
Human Capital
As of March 4, 2022, we employed 426 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 COO, focuses on the health and safety of our employees, development and retention of
current employees, and talent attraction. Our COO is also responsible for our diversity, equity and inclusion (“DE&I”) strategies. The CEO, CFO and COO regularly update 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. Also in 2021, we continued to implement strategies to mitigate the risk of
COVID-19 in the workplace.
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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 can frequently survey our workforce and focus our
efforts on maximizing employee engagement and retention. The system is configured to use text messaging, in addition to email notifications, to increase participation with our distributed workforce.
Diversity, Equity and Inclusion: We place a high value on DE&I. As of December 31, 2021, approximately 33% of our workforce was female and 24% of our employees in
managerial roles were female. As of the same date, underrepresented minorities made up approximately 27% of our workforce, with 19% 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 2021, we had 20 internal promotions within the organization.
Retaining Talent: During the year ended December 31, 2021, our employee turnover rate was 16.5%. 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.
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 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 our Company will maximize its return to shareholders by implementing strategies and establishing goals to address public health, mitigating environmental risks, seeking and integrating a diverse range of viewpoints, and displaying
responsible behaviors to suppliers, customers, members of the organization and most of all to its consumers.
The Company’s Board of Directors voted on March 22, 2021, to add Environmental, Social, and Governance oversight to the Nominating and Governance Committee portfolio. In recognition of the committee’s expanded
role, the Nominating and Governance Committee was renamed the Nominating and ESG Committee.
The Company 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 results of the review were favorable
and the Company is currently implementing action plans to address gaps that were identified by NCS.
Public Health
One key aspect of our ESG program, is our distinct focus on TPB’s 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. Turning Point Brands’ 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
Company’s 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 R&D, scientific, policy, and product resources to increase the number of consumers choosing products that are lower risk.
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In September 2020, we submitted to the U.S. Food and Drug Administration Premarket Tobacco Applications (“PMTAs”) covering 250 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 it 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 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. The Company plans 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 TPB’s own online retail (B2C) sales, TPB utilizes a robust third-party age verification process for all online purchases by consumers. On its business-to-business (B2B) website
section, TPB offers suggestions of resources for its downstream customers related to prevention of youth access. These resources include information related to retailer-focused FDA guidance, third-party age verification software available to both
brick-and-mortar and online sellers, and helpful websites that offer compliance tools, e.g., WeCard.
Environmental Stewardship
Being good stewards of the planet will support our business success. We will achieve this by transitioning our fleet to lower emissions vehicles, implementing energy saving initiatives in all of our locations,
using renewable energy, and investing in Renewable Energy Credits (RECs) and Verified Emissions Reductions (VERs). We are also focused on reducing our water consumption and lowering our waste streams with increased recycling efforts. Within each
of these categories we will continue to define and update our metrics to measure our environmental impact based on Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), Task Force on Climate-related Financial
Disclosures (TCFD), and the United Nations Sustainable Development Goals (SDGs).
Social Impact
In 2021, we continued to mobilize our internal resources during the COVID-19 crisis to ensure the continuity of supply of our products to our customers and consumers while devoting company resources to assist the community at large, including:
Our Social program focuses on the safety of our people and the diversity of our workforce. Our goals are to provide an injury-free and diverse workforce in order to provide a winning culture and be the employer of
choice. We actively monitor and train against our safety program and have safety committees dedicated to implementing best practices and improving our safe working environment. We have established meaningful measures for our Social program and
our targets and actions will allow us to achieve our goals in this area.
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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.
2021 Highlights
In 2021, we implemented several ESG committees to integrate ESG principles into our business practices. The 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, COO, CFO, General Counsel, and Senior Vice-President of Sustainability. The following committees were formed and are actively working:
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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Item 1A. Risk Factors
The risk factors summarized and detailed below could materially harm our business, operating results and/or financial condition, impair our future prospects and/or cause the price of our common stock to decline.
These are not all of the risks we face and other factors not presently known to us or that we currently believe are immaterial may also affect our business if they occur. Material risks that may affect our business, operating results and
financial condition include, but are not necessarily limited to, those relating to:
Risks Related to Our Business and Industry
• our dependence on a small number of third-party suppliers and producers;
• failure to maintain consumer brand recognition and loyalty of our customers;
• intense competition and our ability to compete effectively;
• contamination of our tobacco supply or products;
Risks Related to Legal, Tax and Regulatory Matters
• substantial and increasing U.S. regulation;
• increase in tax of our NewGen products could adversely affect our business;
• possible increasing international control and regulation;
• failure to comply with environmental, health and safety regulations;
• imposition of significant tariffs on imports into the U.S.;
• significant product liability litigation;
• the effect of the COVID-19 pandemic on our business;
Risks Related to Financial Results, Finances and Capital Structure
• our amount of indebtedness;
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Risks Related to our Common Stock
General Risks
• our reliance on information technology;
• cybersecurity and privacy breaches;
• failure to manage our growth;
• fluctuations in our results;
• exchange rate fluctuations;
• adverse U.S. and global economic conditions;
• infringement on or misappropriation of our intellectual property;
• third-party claims that we infringe on their intellectual property; and
Risks Related to Our Business and Industry
Sales of tobacco products are generally expected to continue to decline.
As a result of restrictions on advertising and promotions, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of tobacco and
tobacco-related products, increased pressure from anti-tobacco groups, and other factors, the overall U.S. market for tobacco products has generally been declining in terms of volume of sales and is expected to continue to decline. The general climate of declining sales of tobacco products is principally driven by the long-standing declines in cigarettes. OTP, on the other hand, as measured by MSAi, have continued to generate modest consumer unit
volume gains. Additionally, cigarillo cigars and MYO cigar wraps have each demonstrated MSAi volume gains in recent years. Our tobacco products comprised approximately 68% of our total 2021 net sales and, while
some of our sales volume declines have been offset by higher prices or by increased sales in other product categories, there can be no assurance that these price increases or increased sales can be sustained, especially in an environment of
increased regulation, product characteristic restrictions, and taxation and changes in consumer spending habits.
We depend on a small number of key third-party suppliers and producers for our products.
Our operations are largely dependent on a small number of key suppliers and producers to supply or manufacture our products pursuant to long-term contracts. In 2021, our two most important
suppliers and producers were: (i) Swedish Match, which produces all of our loose leaf chewing tobacco in the U.S.; and (ii) RTI, which provides us with exclusive access to the Zig-Zag® cigarette paper and related accessories in the U.S. and Canada. See “Item 1 – Business – Distribution and Supply Agreements”
All of our loose-leaf tobacco products are manufactured for us by Swedish Match pursuant to a ten-year renewable agreement, which we entered into in 2008. The agreement 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 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. Under this agreement, we retain the rights to all marketing, distribution and trademarks over the
loose-leaf brands that we own or license. The agreement renewed for an additional ten-year term in 2018. We share responsibilities with Swedish Match related to process control, manufacturing activities, quality control, and inventory management
with respect to our loose-leaf products. We rely on the performance by Swedish Match of its obligations under the agreement for the production of our loose-leaf tobacco products. Any significant disruption in Swedish Match’s manufacturing
capabilities or our relationship with Swedish Match, a deterioration in Swedish Match’s financial condition, or an industry-wide change in business practices with respect to loose leaf tobacco products could have a material adverse effect on our
business, results of operations, and financial condition.
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All of our Zig-Zag® premium cigarette papers, cigarette tubes, and
injectors are sourced from RTI, pursuant to the Distribution Agreements. In November 2020, Bolloré sold its rights to its trademarks for the Zig-Zag® brand name in the U.S. and Canada to RTI and, in
connection with the sale, assigned the Distribution Agreements and the License Agreements to RTI. RTI is an affiliate of one of our competitors. The Distribution Agreements were most recently renewed in 2012 and pursuant to such agreements, we
renegotiate pricing terms every five years. The Distribution Agreements were initially entered into with Bolloré, the original holder of the cigarette paper-related trademarks for the Zig-Zag® brand name.
Pursuant to agreements with certain suppliers, we have agreed to store tobacco inventory purchased on our behalf and generally maintain a 12- to 24-month supply of our various tobacco products
at their facilities. We cannot guarantee our supply of these products will be adequate to meet the demands of our customers. Further, a major fire, violent weather conditions, or other disasters that affect us or any of our key suppliers or
producers, including RTI or Swedish Match, as well as those of our other suppliers and vendors, could have a material adverse effect on our operations. Although we have insurance coverage for some of these events, a prolonged interruption in our
operations, as well as those of our producers, suppliers, or vendors, could have a material adverse effect on our business, results of operations, and financial condition. In addition, we do not know whether we will be able to renew any or all of
our agreements on a timely basis, on terms satisfactory to us, or at all.
Any disruptions in our relationships with RTI or Swedish Match or any other significant supplier, a failure to renew any of our agreements, an inability or unwillingness by any supplier to
produce sufficient quantities of our products in a timely manner or finding a new supplier would have a significant impact on our ability to continue distributing the same volume and quality of products and maintain our market share, even during
a temporary disruption, which could have a material adverse effect on our business, results of operations and financial condition.
We may be unable to identify or contract with new suppliers or producers in the event of a disruption to our supply of products.
In order to continue selling our products in the event of a disruption to our supply, we would have to identify new suppliers or producers that would be required to satisfy significant
regulatory requirements. Only a limited number of suppliers or producers (if any) may have the ability to produce our products at the volumes we need, and it could be costly or time-consuming to locate and approve such alternative sources.
Moreover, it may be difficult or costly to find suppliers to produce small volumes of our new products in the event we are looking only to supplement current supply as suppliers may impose minimum order requirements. In addition, we may be unable
to negotiate pricing or other terms with our existing or new suppliers as favorable as those we currently enjoy. Even if we were able to successfully identify new suppliers and contract with them on favorable terms, these new suppliers would also
be subject to stringent regulatory approval procedures that could result in prolonged disruptions to our sourcing and distribution processes.
Furthermore, there is no guarantee that a new third-party supplier could accurately replicate the production process and taste profile of our existing products. We cannot guarantee that a
failure to adequately replace our existing suppliers would not have a material adverse effect on our business, results of operations, and financial condition.
Our licenses to use certain brands and trademarks may be terminated or not renewed.
We are reliant upon brand recognition in the OTP markets in which we compete as the OTP industry is characterized by a high degree of brand loyalty and a reluctance to switch to new or
unrecognizable brands on the part of consumers. Some of the brands and trademarks under which our products are sold are licensed to us for a fixed period of time in respect of specified markets, such as our Distribution and License Agreements for
use of the Zig-Zag® name and associated trademarks in connection with certain of our cigarette papers and related products.
We have a number of Licensing Agreements with RTI. The first of these governs licensing, sourcing and the use of the Zig-Zag® name with respect to cigarette papers, cigarette tubes, and cigarette injector machines, the second of which governs licensing, sourcing and the use of the Zig-Zag® name with respect to e-cigarettes, vaporizers, and e-liquids, and the third of which governs the licensing, sourcing and use of the
Zig-Zag trademark on paper cones. In 2021, we generated approximately $163 million in net sales of Zig-Zag® products, of
which approximately $79 million was generated from products sold through the License Agreements. In the event that one or more of these Licensing Agreements are not renewed, the terms of the agreements bind us under a five-year non-compete
clause, under which we cannot engage in direct or indirect manufacturing, selling, distributing or otherwise promoting of cigarette papers of a competitor to Zig-Zag® without RTI’s consent, except in
limited instances. We do not know whether we will renew these agreements on a timely basis, on terms satisfactory to us, or at all. As a result of these restrictions, if our licensing agreements with respect to the Zig-Zag® trademark are terminated, we may not be able to access the markets with recognizable brands that would be positioned to compete in these segments.
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In the event that the licenses to use the brands and trademarks in our portfolio are terminated or are not renewed after the end of the term, there is no guarantee we will be able to find a
suitable replacement, or if a replacement is found, that it will be on favorable terms. Any loss in our brand-name appeal to our existing customers as a result of the lapse or termination of our licenses could have a material adverse effect on
our business, results of operations, and financial condition.
We may not be successful in maintaining the consumer brand recognition and loyalty of our products.
We compete in a market that relies on innovation and the ability to react to evolving consumer preferences. The alternative smoking accessories and tobacco industries in general, and the OTP
industry, in particular, are subject to changing consumer trends, demands, and preferences. Therefore, products once favored may over time become disfavored by consumers or no longer perceived as the best option. Consumers in the OTP market have
demonstrated a high degree of brand loyalty, but producers must continue to adapt their products in order to maintain their status among these customers as the market evolves. The Zig-Zag® brand has strong brand recognition among smokers, and our continued success depends in part on our ability to continue to differentiate the brand names that we own or
license and maintain similarly high levels of recognition with target consumers. Trends within the alternative smoking accessories and OTP industries change often. Our failure to anticipate, identify, or react to changes in these trends could,
among other things, lead to reduced demand for our products. Factors that may affect consumer perception of our products include health trends and attention to health concerns associated with tobacco, price-sensitivity in the presence of
competitors’ products or substitute products, and trends in favor of new NewGen products that are currently being researched and produced by participants in our industry. For example, in recent years, we have witnessed a shift in consumer
purchases from chewing tobacco to moist snuff due to its increased affordability. Along with our biggest competitors in the chewing tobacco market, which also produce moist snuff, we have been able to shift priorities and adapt to this change. A
failure to react to similar trends in the future could enable our competitors to grow or establish their brands’ market shares in these categories before we have a chance to respond.
Consumer perceptions of tobacco-based products are likely to continue to shift, and our success depends, in part, on our ability to anticipate these shifting tastes and the rapidity with which
the markets in which we compete will evolve in response to these changes on a timely and affordable basis. If we are unable to respond effectively and efficiently to changing consumer preferences, the demand for our products may decline, which
could have a material adverse effect on our business, results of operations, and financial condition.
Regulations may be enacted in the future, particularly in light of increasing restrictions on the form and content of marketing of tobacco products, that would make it more difficult to appeal
to our consumers or to leverage existing recognition of the brands that we own or license. Furthermore, even if we are able to continue to distinguish our products, there can be no assurance that the sales, marketing, and distribution efforts of
our competitors will not be successful in persuading consumers of our products to switch to their products. Many of our competitors have greater access to resources than we do, which better positions them to conduct market research in relation to
branding strategies or costly marketing campaigns. Any loss of consumer brand loyalty to our products or reduction of our ability to effectively brand our products in a recognizable way will have a material effect on our ability to continue to
sell our products and maintain our market share, which could have a material adverse effect on our business, results of operations, and financial condition.
Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains.
Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains to sell and promote our products, which is dependent upon the strength of
the brand names that we own or license and our salesforce effectiveness. In order to maintain these relationships, we must continue to supply products that will bring steady business to these retailers and national chains. We may not be able to
sustain these relationships or establish other relationships with such entities, which could have a material adverse effect on our ability to execute our branding strategies, our ability to access the end-user markets with our products or our
ability to maintain our relationships with the producers of our products. For example, if we are unable to meet benchmarking provisions in contracts or if we are unable to maintain and leverage our retail relationships on a scale sufficient to
make us an attractive distributor, it would have a material adverse effect on our ability to source products, and on our business, results of operations and financial condition. In addition, there are factors beyond our control that may prevent
us from leveraging existing relationships, such as industry consolidation. If we are unable to develop and sustain relationships with large retailers and national chains, or we are unable to leverage those relationships due to factors such as a
decline in the role of brick-and-mortar retailers in North America, our capacity to maintain and grow brand and product recognition and increase sales volume will be significantly undermined. In such an event, we may ultimately be forced to
pursue and rely on local and more fragmented sales channels, which will have a material adverse effect on our business, results of operations and financial condition.
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We face intense competition and may fail to compete effectively.
We are subject to significant competition across our segments and compete against companies in all segments that have access to significant resources in terms of technology, relationships with
suppliers and distributors and access to cash flow and financial markets.
The OTP industry is characterized by brand recognition and loyalty, with product quality, price, marketing and packaging constituting the primary methods of competition. Substantial marketing
support, merchandising display, competitive pricing and other financial incentives generally are required to introduce a new brand or to improve or maintain a brand’s market position. Our principal competitors are “big tobacco,” Altria Group,
Inc. (formerly Phillip Morris) and British American Tobacco p.l.c. (formerly Reynolds) as well as Swedish Match, Swisher International and manufacturers of electronic cigarettes, including U.K.-based Imperial Brands PLC. These competitors are
significantly larger than us and aggressively seek to limit the distribution or sale of other companies’ products, both at the wholesale and retail levels. For example, certain competitors have entered into agreements limiting
retail-merchandising displays of other companies’ products or imposing minimum prices for OTP products, thereby limiting their competitors’ ability to offer discounted products. In addition, the tobacco industry is experiencing a trend toward
industry consolidation, most recently evidenced by the December 2018 investment in Juul Labs by Altria, the July 2017 acquisition of Reynolds American, Inc., by British American Tobacco p.l.c., and the June 2015 acquisition of Lorillard, Inc., by
Reynolds American, Inc. Additional industry consolidation could result in a more competitive environment if our competitors are able to increase their combined resources, enhance their access to national distribution networks, or become acquired
by established companies with greater resources than ours. Any inability to compete due to our smaller scale as the industry continues to consolidate and be dominated by “big tobacco” could have a material adverse effect on our business, results
of operations and financial condition.
“Big tobacco” has also established its presence in the NewGen products market and has begun to make investments in the alternative space. There can be no assurance that our products will be
able to compete successfully against these companies or any of our other competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels than us. In addition, there are currently
relatively few U.S. restrictions on advertising electronic cigarettes and vaporizer products and competitors, including “big tobacco,” may have more resources than us for advertising expenses, which could have a material adverse effect on our
ability to build and maintain market share, and thus have a material adverse effect on our business, results of operations and financial condition.
The competitive environment and our competitive position are also significantly influenced by economic conditions, the state of consumer confidence, competitors’ introduction of low-priced
products or innovative products, higher taxes, higher absolute prices and larger gaps between price categories and product regulation that diminishes the consumer’s ability to differentiate tobacco products. Due to the impact of these factors, as
well as higher state and local excise taxes and the market share of deep discount brands, the tobacco industry has become increasingly price competitive. As we seek to adapt to the price competitive environment, our competitors that are better
capitalized may be able to sustain price discounts for long periods of time by spreading the loss across their expansive portfolios, with which we are not positioned to compete.
Competition from illicit sources may have an adverse effect on our overall sales volume, restricting the ability to increase selling prices and damaging brand equity.
Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products and locally manufactured products on which applicable taxes or regulatory requirements are
evaded, represent a significant and growing threat to the legitimate tobacco industry. Factors such as increasing tax regimes, regulatory restrictions, and compliance requirements have resulted in more consumers switching to illegal, cheaper
tobacco products and providing greater rewards for smugglers. We expect that this trend will continue and even accelerate if additional regulatory requirements make it more difficult or expensive to obtain genuine products. Illicit trade can have
an adverse effect on our overall sales volume, restrict the ability to increase selling prices, damage brand equity and may lead to commoditization of our products.
Although we combat counterfeiting of our products by engaging in certain tactics, such as requiring all sales force personnel to randomly collect our products from retailers in order to be
reviewed for authenticity and using a private investigation firm to help perform surveillance of retailers we suspect are selling counterfeit products, no assurance can be given that we will be able to detect or stop sales of all counterfeit
products. In addition, we have in the past and will continue to bring suits against retailers and distributors that sell certain counterfeit products. While we have been successful in securing financial recoveries from and helping to obtain
criminal convictions of counterfeiters in the past, no assurance can be given that we will be successful in any such suits or that such suits will be successful in stopping other retailers or distributors from selling counterfeit products. Even
if we are successful, such suits could consume a significant amount of management’s time and could also result in significant expenses to the company. Any failure to track and prevent counterfeiting of our products could have a material adverse