UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2021

or

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission file number: 001-37763

TURNING POINT BRANDS, INC.
(Exact name of registrant as specified in its charter)

Delaware 20-0709285
(State or other jurisdiction of Incorporation or organization) (I.R.S. Employer Identification No.)

5201 Interchange Way, Louisville, KY 40229
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueTPBNew York Stock Exchange

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, 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No  ☑

At April 28,October 19, 2021, there were 19,059,44918,873,183 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.



Table of Contents

TURNING POINT BRANDS, INC.
TABLE OF CONTENTS

 Page No.
PART I—FINANCIAL INFORMATION 
  
 ITEM 1Financial Statements (Unaudited) 
    
  
Consolidated Balance Sheets as of March 31,September 30, 2021, and December 31, 2020
5
    
  
Consolidated Statements of Income for the three months ended March 31,September 30, 2021 and 2020
6
Consolidated Statements of Income for the nine months ended September 30, 2021 and 2020
7
    
  
Consolidated Statements of Comprehensive Income for the three and nine months ended March 31,September 30, 2021 and 2020
78
    
  
Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2021 and 2020
89
    
  
Consolidated Statements of Changes in Stockholder’s Equity (Deficit) for the three months ended March 31,September 30, 2021 and 2020
910
Consolidated Statements of Changes in Stockholder’s Equity (Deficit) for the nine months ended September 30, 2021 and 2020
11
    
  
Notes to Consolidated Financial Statements
1012
    
 ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3439
    
 ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
4452
    
 ITEM 4
Controls and Procedures
4553
    
PART II—OTHER INFORMATION 
  
 ITEM 1
Legal Proceedings
4654
    
 ITEM 1A
Risk Factors
4654
    
 ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
4656
    
 ITEM 3
Defaults Upon Senior Securities
4656
    
 ITEM 4
Mine Safety Disclosures
4656
    
 ITEM 5
Other Information
4656
    
 ITEM 6
Exhibits
4757
    
 
Signatures
 4858

2
Table of Contents
Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may generally be identified by the use of 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. 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 Turning Point Brands, Inc. (“TPB”), in this Quarterly Report on Form 10-Q speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for TPB to predict these events or how they may affect it. TPB has no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required by federal securities laws. Factors that could cause these differences include, but are not limited to:

declining sales of tobacco products, and expected continuing decline of sales, in the tobacco industry overall;
our dependence on a small number of third-party suppliers and producers;
the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption;
•
the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption, as well as other supply chain concerns, including delays in product shipments and increases in freight cost;
the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;
failure to maintain consumer brand recognition and loyalty of our customers;
our reliance on relationships with several large retailers and national chains for distribution of our products;
intense competition and our ability to compete effectively;
competition from illicit sources and the damage caused by illicit products to brand equity;
contamination of our tobacco supply or products;
substantial and increasing U.S. regulation;
regulation or marketing denials of our products by the FDA, which has broad regulatory powers;
many of our products contain nicotine, which is considered to be a highly addictive substance;
requirement to maintain compliance with master settlement agreement;
possible significant increases in federal, state and local municipal tobacco- and vapor-related taxes;
uncertainty and continued evolution of regulation of our NewGen and cigar products;
our products are subject to developing and unpredictable regulation, such as court actions that impact obligations;
increase in state and local regulation of our NewGen products has been proposed or enacted;
increase in tax of our NewGen products could adversely affect our business;
sensitivity of end-customers to increased sales taxes and economic conditions;
•
sensitivity of end-customers to increased sales taxes and economic conditions including significant increases in the rate of inflation and other declines in purchasing power;
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.; 
the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;
infringement on or misappropriation of our intellectual property;
third-party claims that we infringe on their intellectual property;
significant product liability litigation;
the effect of the COVID-19 pandemic on our business;
our amount of indebtedness;
the terms of our indebtedness, which may restrict our current and future operations;
our loss of emerging growth status on December 31, 2021 and ability to comply with the additional disclosure requirements applicable to non-emerging growth companies;
reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors, potentially decreasing our stock price;
our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;
•
our certificateof incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors (as defined in our Certificate of Incorporation) being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;
3
Table of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;Contents
future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us;

3
we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;
our business may be damaged by events outside of our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters;
our reliance on information technology;
cybersecurity and privacy breaches;
failure to manage our growth;
failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;
fluctuations in our results;
•fluctuations in our results;
exchange rate fluctuations;
adverse U.S. and global economic conditions;
departure of key management personnel or our inability to attract and retain talent; and
failure to meet expectations relating to environmental, social and governance factors.

4

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)
(unaudited)

ASSETS 
March 31,
2021
  
December 31,
2020
 
Current assets:      
Cash $167,361  $41,765 
Accounts receivable, net of allowances of $148 in 2021 and $150 in 2020
  6,606   9,331 
Inventories  98,351   85,856 
Other current assets  24,866   26,451 
Total current assets  297,184   163,403 
Property, plant, and equipment, net  15,648   15,524 
Deferred income taxes  0   610 
Right of use assets  17,406   17,918 
Deferred financing costs, net  464   641 
Goodwill  159,808   159,621 
Other intangible assets, net  78,945   79,422 
Master Settlement Agreement (MSA) escrow deposits  31,477   32,074 
Other assets  26,373   26,836 
Total assets $627,305  $496,049 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $24,166  $9,201 
Accrued liabilities  31,845   35,225 
Current portion of long-term debt  5,000   12,000 
Other current liabilities  205   203 
Total current liabilities  61,216   56,629 
Notes payable and long-term debt  424,802   302,112 
Deferred income taxes  735   0 
Lease liabilities  15,570   16,117 
Other long-term liabilities  0   3,704 
Total liabilities  502,323   378,562 
         
Commitments and contingencies  0   0 
         
Stockholders’ equity:        
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
  0   0 
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 19,576,821 issued shares and 19,059,120 outstanding shares at March 31, 2021, and 19,532,464 issued shares and 19,133,794 outstanding shares at   December 31, 2020
  196   195 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
  0   0 
Additional paid-in capital  102,879   102,423 
Cost of repurchased common stock (517,701 shares at March 31, 2021 and 398,670 shares at December 31, 2020)
  (15,924)  (10,191)
Accumulated other comprehensive loss  (480)  (2,635)
Accumulated earnings  34,357   23,645 
Non-controlling interest  3,954   4,050 
Total stockholders’ equity  124,982   117,487 
Total liabilities and stockholders’ equity $627,305  $496,049 
ASSETS 
(unaudited)
September 30,
2021
  
December 31,
2020
 
Current assets:      
Cash $130,551  $41,765 
Accounts receivable, net of allowances of $138 in 2021 and $150 in 2020
  8,507   9,331 
Inventories  98,605   85,856 
Other current assets  27,113   26,451 
Total current assets  264,776   163,403 
Property, plant, and equipment, net  17,596   15,524 
Deferred income taxes  0   610 
Right of use assets  15,984   17,918 
Deferred financing costs, net  415   641 
Goodwill  162,415   159,621 
Other intangible assets, net  87,962   79,422 
Master Settlement Agreement (MSA) escrow deposits  31,763   32,074 
Other assets  42,810   26,836 
Total assets $623,721  $496,049 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $13,151  $9,201 
Accrued liabilities  33,349   35,225 
Current portion of long-term debt  7,485   12,000 
Other current liabilities  71   203 
Total current liabilities  54,056   56,629 
Notes payable and long-term debt  413,553   302,112 
Deferred income taxes  1,654   0 
Lease liabilities  14,201   16,117 
Other long-term liabilities  0   3,704 
Total liabilities  483,464   378,562 
         
Commitments and contingencies  0   0 
         
Stockholders’ equity:        
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
  0   0 
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 19,690,884 issued shares and 18,873,183 outstanding shares at September 30, 2021, and 19,532,464 issued shares and 19,133,794 outstanding shares at December 31, 2020
  197   195 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
  0   0 
Additional paid-in capital  107,269   102,423 
Cost of repurchased common stock (817,701 shares at September 30, 2021 and 398,670 shares at December 31, 2020)
  (30,672)  (10,191)
Accumulated other comprehensive loss  (123)  (2,635)
Accumulated earnings  61,052   23,645 
Non-controlling interest  2,534   4,050 
Total stockholders’ equity  140,257   117,487 
Total liabilities and stockholders’ equity $623,721  $496,049 

The accompanying notes are an integral part of the consolidated financial statements.

5
Table of Contents

Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)

 
Three Months Ended
March 31,
 
  2021  2020 
Net sales $107,641  $90,689 
Cost of sales  54,380   49,258 
Gross profit  53,261   41,431 
Selling, general, and administrative expenses  28,912   32,394 
Operating income  24,349   9,037 
Interest expense, net  4,486   3,309 
Investment income  (25)  (91)
Loss on extinguishment of debt  5,706   0 
Net periodic income, excluding service cost  0   (87)
Income before income taxes  14,182   5,906 
Income tax expense  2,654   1,407 
Consolidated net income  11,528   4,499 
Net loss attributable to non-controlling interest  (255)  0 
Net income attributable to Turning Point Brands, Inc. $11,783  $4,499 
         
Basic income per common share:        
Net income attributable to Turning Point Brands, Inc. $0.62  $0.23 
Diluted income per common share:        
Net income attributable to Turning Point Brands, Inc. $0.57  $0.22 
Weighted average common shares outstanding:        
Basic  19,093,961   19,689,446 
Diluted  22,665,067   20,106,800 

 
Three Months Ended
September 30,
 
  2021  2020 
       
Net sales $109,904  $104,174 
Cost of sales  55,635   55,867 
Gross profit  54,269   48,307 
Selling, general, and administrative expenses  31,894   32,286 
Operating income  22,375   16,021 
Interest expense, net  5,397   3,539 
Investment income  (157)  (3)
Gain on extinguishment of debt
  (375)  0 
Net periodic income, excluding service cost  0   1,188
Income before income taxes  17,510   11,297 
Income tax expense  4,073   2,277 
Consolidated net income  13,437   9,020 
Net loss attributable to non-controlling interest  (31)  0 
Net income attributable to Turning Point Brands, Inc. $13,468  $9,020 
         
Basic income per common share:        
Net income attributable to Turning Point Brands, Inc. $0.71  $0.47 
Diluted income per common share:        
Net income attributable to Turning Point Brands, Inc. $0.65  $0.44 
Weighted average common shares outstanding:        
Basic  18,897,974   19,240,187 
Diluted  22,364,807   22,839,797 

The accompanying notes are an integral part of the consolidated financial statements.


6
Table of Contents

Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)thousands except share data)
(unaudited)

 
Three Months Ended
March 31,
 
  2021  2020 
Consolidated net income $11,528  $4,499 
         
Other comprehensive income, net of tax        
Amortization of unrealized pension and postretirement gain (loss), net of tax of $0 in 2021 and $2 in 2020
  0   9 
Unrealized loss on MSA investments, net of tax of $144 in 2021 and $0 in 2020
  (452)  0 
Foreign currency translation, net of tax of $0 in 2021 and 2020
  318   0 
Unrealized gain (loss) on derivative instruments, net of tax of $937 in 2021 and $624 in 2020
  2,448   (1,615)
   2,314   (1,606)
Consolidated comprehensive income  13,842   2,893 
Comprehensive (loss) income attributable to non-controlling interest  (96)  0 
Comprehensive income attributable to Turning Point Brands, Inc. $13,938  $2,893 

 
Nine Months Ended
September 30,
 
  2021  2020 
       
Net sales $340,188  $299,826 
Cost of sales  172,685   162,152 
Gross profit  167,503   137,674 
Selling, general, and administrative expenses  95,900   95,436 
Operating income  71,603   42,238 
Interest expense, net  15,406   10,143 
Investment income  (292)  (128)
Loss on extinguishment of debt  5,331   0 
Net periodic income, excluding service cost  0   997
Income before income taxes  51,158   31,226 
Income tax expense  11,151   7,412 
Consolidated net income  40,007   23,814 
Net loss attributable to non-controlling interest  (598)  0 
Net income attributable to Turning Point Brands, Inc. $40,605  $23,814 
         
Basic income per common share:        
Net income attributable to Turning Point Brands, Inc. $2.14  $1.22 
Diluted income per common share:        
Net income attributable to Turning Point Brands, Inc. $1.95  $1.17 
Weighted average common shares outstanding:        
Basic  18,988,435   19,478,297 
Diluted  22,464,542   23,061,499 

The accompanying notes are an integral part of the consolidated financial statementsstatements.

7
Table of Contents

Turning Point Brands, Inc.
Consolidated Statements of Cash FlowsComprehensive Income
(dollars in thousands)
(unaudited)

 
Three Months Ended
March 31,
 
  2021  2020 
Cash flows from operating activities:      
Consolidated net income $11,528  $4,499 
Adjustments to reconcile net income to net cash provided by operating activities:        
Loss on extinguishment of debt  5,706   0 
Gain on sale of property, plant, and equipment  (2)  0 
Depreciation expense  788   851 
Amortization of other intangible assets  477   425 
Amortization of deferred financing costs  604   552 
Deferred income taxes  552   1,006 
Stock compensation expense  1,498   455 
Noncash lease expense  6   13 
Gain on investments  (13)  0 
Changes in operating assets and liabilities:        
Accounts receivable  2,735   2,596 
Inventories  (12,461)  1,784 
Other current assets  1,283   (2,420)
Other assets  464   (130)
Accounts payable  14,882   3,210 
Accrued postretirement liabilities  0   (27)
Accrued liabilities and other  (3,806)  1,913 
Net cash provided by operating activities $24,241  $14,727 
         
Cash flows from investing activities:        
Capital expenditures $(842) $(877)
Restricted cash, MSA escrow deposits  (14,920)  0 
Proceeds on the sale of property, plant and equipment  2   0 
Net cash used in investing activities $(15,760) $(877)
         
Cash flows from financing activities:        
Proceeds from Senior Secured Notes $250,000  $0 
Payments of 2018 first lien term loan  (130,000)  (2,000)
Settlement of interest rate swaps  (3,573)  0 
Payment of IVG note  0   (4,240)
Payment of dividends  (958)  (886)
Payments of financing costs  (6,614)  (168)
Exercise of options  425   227 
Redemption of options  (1,466)  0 
Common stock repurchased  (5,733)  (2,627)
Net cash provided by (used in) financing activities $102,081  $(9,694)
         
Net increase in cash $110,562  $4,156 
Effect of foreign currency translation on cash $101  $0 
         
Cash, beginning of period:        
Unrestricted  41,765   95,250 
Restricted  35,074   32,074 
Total cash at beginning of period  76,839   127,324 
         
Cash, end of period:        
Unrestricted  167,361   99,406 
Restricted  20,141   32,074 
Total cash at end of period $187,502  $131,480 
         
Supplemental schedule of noncash financing activities:        
Dividends declared not paid $1,071  $998 
Accrued expenses for incurred financing costs $301  $13 

 
Three Months Ended
September 30,
 
  2021  2020 
Consolidated net income $13,437  $9,020 
         
Other comprehensive income (loss), net of tax        
Amortization of unrealized pension and postretirement gain, net of tax of $0 in 2021 and $62 in 2020
  0   1,816 
Unrealized loss on MSA investments, net of tax of $14 in 2021 and $0 in 2020
  (43)  0 
Foreign currency translation, net of tax of $0 in 2021 and 2020
  (637)  0 
Unrealized gain on derivative instruments, net of tax of $1 in 2021 and $84 in 2020
  3   238 
   (677)  2,054 
Consolidated comprehensive income  12,760   11,074 
Comprehensive loss attributable to non-controlling interest  (306)  0 
Comprehensive income attributable to Turning Point Brands, Inc. $13,066  $11,074 


 
Nine Months Ended
September 30,
 
  2021  2020 
Consolidated net income $40,007  $23,814 
         
Other comprehensive income (loss), net of tax        
Amortization of unrealized pension and postretirement gain, net of tax of $0 in 2021 and $57 in 2020
  0   1,830 
Unrealized loss on MSA investments, net of tax of $75 in 2021 and $0 in 2020
  (235)  0 
Foreign currency translation, net of tax of $0 in 2021 and 2020
  324   0 
Unrealized gain (loss) on derivative instruments, net of tax of $811 in 2021 and $516 in 2020
  2,628   (1,302)
   2,717   528
Consolidated comprehensive income  42,724   24,342 
Comprehensive loss attributable to non-controlling interest  (393)  0 
Comprehensive income attributable to Turning Point Brands, Inc. $43,117  $24,342 

The accompanying notes are an integral part of the consolidated financial statementsstatements.

8
Table of Contents

Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)Cash Flows
(dollars in thousands except share data)thousands)
(unaudited)

 
Voting
Shares
  
Common
Stock,
Voting
  
Additional
Paid-In
Capital
  
Cost of
Repurchased
Common Stock
  
Accumulated
Other
Comprehensive
Loss
  
Accumulated
Earnings (Deficit)
  
Non-
Controlling
Interest
  Total 
                         
Beginning balance January 1, 2021
  19,133,794  $195  $102,423  $(10,191) $(2,635) $23,645  $4,050  $117,487 
                                 
Unrealized loss on MSA investments, net of tax of $144
  -   0   0   0   (452)  0   0   (452)
Unrealized gain on derivative instruments, net of tax of $937
  -   0   0   0   2,448   0   0   2,448 
Foreign currency translation, net of tax of $0
  -   0   0   0   159   0   159   318 
Stock compensation expense  -   0   1,498   0   0   0   0   1,498 
Exercise of options  44,357   1   424   0   0   0   0   425 
Redemption of options  -   0   (1,466)  0   0   0   0   (1,466)
Cost of repurchased common stock  (119,031)  0   0   (5,733)  0   0   0   (5,733)
Dividends  -   0   0   0   0   (1,071)  0   (1,071)
Net income  -   0   0   0   0   11,783   (255)  11,528 
Ending balance March 31, 2021
  19,059,120  $196  $102,879  $(15,924) $(480) $34,357  $3,954  $124,982 
                                 
                                 
Beginning balance January 1, 2020
  19,680,673  $197  $125,469  $0  $(3,773) $(15,308) $0  $106,585 
                                 
Unrecognized pension and postretirement cost adjustment, net of tax of $2
  -   0   0   0   9   0       9 
Unrealized loss on derivative instruments, net of tax of $624
  -   0   0   0   (1,615)  0       (1,615)
Stock compensation expense  -   0   455   0   0   0       455 
Exercise of options  42,407   0   227   0   0   0       227 
Cost of repurchased common stock  (134,130)  0   0   (2,627)  0   0       (2,627)
Dividends  -   0   0   0   0   (998)      (998)
Net income  -   0   0   0   0   4,499       4,499 
Cumulative effect of change in accounting principle  -   0   (24,939)  0   0   6,436       (18,503)
Ending balance March 31, 2020
  19,588,950  $197  $101,212  $(2,627) $(5,379) $(5,371) $0  $88,032 

 
Nine Months Ended
September 30,
 
  2021  2020 
Cash flows from operating activities:      
Consolidated net income $40,007  $23,814 
Adjustments to reconcile net income to net cash provided by operating activities:        
Loss on extinguishment of debt  5,331   0 
Pension settlement and curtailment loss
  0   1,188 
Impairment loss  0   149 
(Gain) loss on sale of property, plant, and equipment  (2)  36 
Depreciation expense  2,313   2,482 
Amortization of other intangible assets  1,431   1,304 
Amortization of deferred financing costs  1,895   1,670 
Deferred income taxes  1,528   2,259 
Stock compensation expense  6,015   1,986 
Noncash lease (income) expense  (49)  179 
Gain on MSA escrow deposits  (144)  0 
Changes in operating assets and liabilities:        
Accounts receivable  1,324   (1,877)
Inventories  (10,970)  (2,208)
Other current assets  (491)  (829)
Other assets  685   1,941 
Accounts payable  3,488   (3,200)
Accrued postretirement liabilities  0   (54)
Accrued liabilities and other  (2,796)  4,359 
Net cash provided by operating activities $49,565  $33,199 
         
Cash flows from investing activities:        
Capital expenditures $(4,391) $(3,420)
Acquisitions, net of cash acquired  (16,416)  (37,735)
Payments for investments  (16,657)  0 
Restricted cash, MSA escrow deposits  (14,783)  0 
Proceeds on the sale of property, plant and equipment  2   3 
Net cash used in investing activities $(52,245) $(41,152)
         
Cash flows from financing activities:        
Proceeds from Senior Secured Notes $250,000  $0 
Payments of 2018 first lien term loan  (130,000)  (8,000)
Settlement of interest rate swaps  (3,573)  0 
Payment of promissory note  (9,625)  0 
Payment of IVG note  0   (4,240)
Proceeds from unsecured notes  0   7,485 
Standard Diversified Inc. reorganization, net of cash acquired  0   (1,737)
Payment of dividends  (3,056)  (2,846)
Payments of financing costs  (6,921)  (194)
Exercise of options  2,071   303 
Redemption of options  (2,111)  0 
Common stock repurchased  (20,481)  (7,665)
Net cash provided by (used in) financing activities $76,304  $(16,894)
         
Net increase (decrease) in cash $73,624  $(24,847)
Effect of foreign currency translation on cash $235  $0 
         
Cash, beginning of period:        
Unrestricted  41,765   95,250 
Restricted  35,074   32,074 
Total cash at beginning of period  76,839   127,324 
         
Cash, end of period:        
Unrestricted  130,551   67,403 
Restricted  20,147   35,074 
Total cash at end of period $150,698  $102,477 
         
Supplemental schedule of noncash financing activities:        
Dividends declared not paid $1,255  $1,081 
Issuance of note payable for acquisition $0  $10,000 
Accrued consideration for acquisition $316  $0 

The accompanying notes are an integral part of the consolidated financial statementsstatements.

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Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended September 30, 2021 and 2020
(dollars in thousands except share data)
(unaudited)


 
Voting
Shares
  
Common
Stock,
Voting
  
Additional
Paid-In
Capital
  
Cost of
Repurchased
Common Stock
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Accumulated
Earnings (Deficit)
  
Non-
Controlling
Interest
  Total 
                         
Beginning balance July 1, 2021
  18,923,523  $196  $105,460  $(24,277) $279  $48,647  $3,963  $134,268 
                                 
Unrealized loss on MSA investments, net of tax of $14
  -   0   0   0   (43)  0   0   (43)
Unrealized gain on derivative instruments, net of tax of $1
  -   0   0   0   3   0   0   3 
Foreign currency translation, net of tax of $0
  -   0   0   0   (362)  0   (275)  (637)
Stock compensation expense  -   0   1,752   0   0   0   0   1,752 
Exercise of options  74,660   1   1,184   0   0   0   0   1,185 
Cost of repurchased common stock  (125,000)  0   0   (6,395)  0   0   0   (6,395)
Acquisition of Recreation Marketing interest  -   0   (1,127)  0   0   0   (1,123)  (2,250)
Dividends  -   0   0   0   0   (1,063)  0   (1,063)
Net income  -   0   0   0   0   13,468   (31)  13,437 
Ending balance September 30, 2021
  18,873,183  $197  $107,269  $(30,672) $(123) $61,052  $2,534  $140,257 
                                 
                                 
Beginning balance July 1, 2020
  19,467,164  $197  $101,989  $(5,289) $(5,299) $3,933  $0  $95,531 
                                 
Unrecognized pension and postretirement cost adjustment, net of tax of $62
  -   0   0   0   1,816   0   0   1,816 
Unrealized gain on derivative instruments, net of tax of $84
  -   0   0   0   238   0   0   238 
Stock compensation expense  -   0   772   0   0   0   0   772 
Exercise of options  4,048   0   58   0   0   0   0   58 
Cost of repurchased common stock  (82,097)  0   0   (2,376)  0   0   0   (2,376)
Standard Diversified Inc. reorganization, net  (244,214)  (2)  0   0   0   (1,735)  0   (1,737)
Dividends  -   0   0   0   0   (975)  0   (975)
Net income  -   0   0   0   0   9,020   0   9,020 
Ending balance September 30, 2020
  19,144,901  $195  $102,819  $(7,665) $(3,245) $10,243  $0  $102,347 

 The accompanying notes are an integral part of the consolidated financial statements.

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Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Nine Months Ended September 30, 2021 and 2020
(dollars in thousands except share data)
(unaudited)


 
Voting
Shares
  
Common
Stock,
Voting
  
Additional
Paid-In
Capital
  
Cost of
Repurchased
Common Stock
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Accumulated
Earnings (Deficit)
  
Non-
Controlling
Interest
  Total 
                         
Beginning balance January 1, 2021
  19,133,794  $195  $102,423  $(10,191) $(2,635) $23,645  $4,050   117,487 
                                 
Unrealized loss on MSA investments, net of tax of $75
  -   0
   0
   0
   (235)  0   0   (235)
Unrealized gain on derivative instruments, net of tax of $811
  -   0   0   0   2,628   0   0   2,628 
Foreign currency translation, net of tax of $0
  -   0   0   0   119   0   205   324 
Stock compensation expense  -   0   6,015   0   0   0   0   6,015 
Exercise of options  158,420   2   2,069   0   0   0   0   2,071 
Redemption of options  -   0   (2,111)  0   0   0   0   (2,111)
Cost of repurchased common stock  (419,031)  0   0   (20,481)  0   0   0   (20,481)
Acquisition of Recreation Marketing interest  -   0   (1,127)  0   0   0   (1,123)  (2,250)
Dividends  -   0   0   0   0   (3,198)  0   (3,198)
Net income  -   0   0   0   0   40,605   (598)  40,007 
Ending balance September 30, 2021
  18,873,183  $197  $107,269  $(30,672) $(123) $61,052  $2,534  $140,257 
                                 
                                 
Beginning balance January 1, 2020
  19,680,673  $197  $100,530  $0  $(3,773) $(8,872) $0  $88,082 
                                 
Unrecognized pension and postretirement cost adjustment, net of tax of $57
  -   0   0   0   1,830   0   0   1,830 
Unrealized loss on derivative instruments, net of tax of $516
  -   0   0   0   (1,302)  0   0   (1,302)
Stock compensation expense  -   0   1,986   0   0   0   0   1,986 
Exercise of options  47,402   0   303   0   0   0   0   303 
Cost of repurchased common stock  (338,960)  0   0   (7,665)  0   0   0   (7,665)
Standard Diversified Inc. reorganization, net  (244,214)  (2)  0   0   0   (1,735)  0   (1,737)
Dividends  -   0   0   0   0   (2,964)  0   (2,964)
Net income  -   0   0   0   0   23,814   0   23,814 
Ending balance September 30, 2020
  19,144,901  $195  $102,819  $(7,665) $(3,245) $10,243  $0  $102,347 

The accompanying notes are an integral part of the consolidated financial statements.

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Turning Point Brands, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)

Note 1. Description of Business and Basis of Presentation

Description of Business

Turning Point Brands, Inc. and its subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products with active ingredients. We sellThe Company sells a wide range of products to adult consumers consisting of staple products with ourits iconic brands Zig-Zag® and Stoker’s® to ourits next generation products to fulfill evolving consumer preferences. We operateThe Company operates in 3 segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) NewGen Products. OurIts 3 focus segments are led by ourits core, proprietary brands – Zig-Zag® in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; and Nu-XTM, Solace® along with ourits distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) in the NewGen Products segment. The Company’s products are available in more than 210,000 retail outlets in North America.

Basis of Presentation

The
The accompanying unaudited interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2020. In the opinion of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated. Such adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2020. The accompanying interim, consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”)and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“GAAP”) with respect to annual financial statements.statements.

Note 2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned, and variable interest entities (“VIEs”) for which the Company is considered the primary beneficiary. All significant intercompany transactions have been eliminated.

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards UpdateCodification (“ASU”ASC”) 2014-09,606, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied –- at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars or vaping products billed to customers).

The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.

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A further requirement of ASU 2014-09ASC 606 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company’s management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 18 of Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales channel can be found within Note 18 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $5.97.1 million and $5.3$5.3 million for the three months ending March 31,September 30, 2021 and 2020, respectivelyrespectively. Shipping costs incurred were approximately $21.1 million and $17.4 million for the nine months ending September 30, 2021 and 2020, respectively. The implementation of the Prevent All Cigarette Trafficking Act (“PACT Act”) in the second quarter of 2021 made the delivery of vape products to customers and consumers more challenging and more costly. In addition, increased sales and higher freight rates are causing shipping costs to increase..

Inventories

Inventories are stated at the lower of cost or net realizable value. Effective January 1, 2021, the Company changed its method of accounting for inventory using the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. The Company applied this change retrospectively to all prior periods presented, which is discussed further in Note 6. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.

Fair Value

GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

The three levels of the fair value hierarchy under GAAP are described below:


●Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.

●Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

●Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Derivative Instruments

Foreign Currency Forward Contracts: The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to 90percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive income into inventory as the related inventories are received and are transferred to net income as inventory is sold. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.

Interest Rate Swap Agreements: The Company enters into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. The Company accounts for its interest rate swap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensive income into net income upon settlement of the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.

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Risks and Uncertainties

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In a number of states, targeted flavor bans have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows. Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.

The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Master Settlement Agreement (MSA):  Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement against the Company. The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of MarchSeptember 31,30, 2021, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $31.531.8 million. At December 31,2020, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. Effective in the third quarter of 2017, the Company no longer sells any product covered under the MSA. Thus, absent a change in legislation, the Company will no longer be required to make deposits to the MSA escrow account.

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The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until maturity. The following shows the fair value

14
Table of the MSA escrow account as of March Contents31,2021 and December 31,2020.

Fair values for the U.S. Governmental agency obligations are Level 2.2 in the fair value hierarchy. The following tables show cost and estimated fair value of the assets held in the MSA account, respectively, as well as the maturities of the U.S. Governmental agency obligations held in such account for the periods indicated.

  
As of March 31, 2021
  As of December 31, 2020 
  Cost  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
  
Cost and
Estimated
Fair Value
 
Cash and cash equivalents $17,141  $0  $0  $17,141  $32,074 
U.S. Governmental agency obligations (unrealized loss position < 12 months)  14,933   0   (597)  14,336   0 
  $32,074  $0  $(597) $31,477  $32,074 

  As of March 31, 2021 
Less than one year $0 
One to five years  0 
Five to ten years  12,984 
Greater than ten years  1,949 
Total $14,933 
  
As of September 30, 2021
  As of December 31, 2020 
  Cost  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
  
Cost and
Estimated
Fair Value
 
Cash and cash equivalents $17,146  $0  $0  $17,146  $32,074 
U.S. Governmental agency obligations (unrealized loss position < 12 months)  14,927   0   (310)  14,617   0 
  $32,073  $0  $(310) $31,763  $32,074 

  As of September 30, 2021 
Less than one year $0 
One to five years  2,000 
Five to ten years  11,476 
Greater than ten years  1,451 
Total $14,927 

The following shows the amount of deposits by sales year for the MSA escrow account:

 Deposits as of 
Sales
Year
 
March 31,
2021
  
December 31,
2020
 
1999 $211  $211 
2000  1,017   1,017 
2001  1,673   1,673 
2002  2,271   2,271 
2003  4,249   4,249 
2004  3,714   3,714 
2005  4,553   4,553 
2006  3,847   3,847 
2007  4,167   4,167 
2008  3,364   3,364 
2009  1,619   1,619 
2010  406   406 
2011  193   193 
2012  199   199 
2013  173   173 
2014  143   143 
2015  101   101 
2016  91   91 
2017  83   83 
         
Total $32,074  $32,074 


 Deposits as of 
Sales
Year
 
September 30,
2021
  
December 31,
2020
 
1999 $211  $211 
2000  1,017   1,017 
2001  1,673   1,673 
2002  2,271   2,271 
2003  4,249   4,249 
2004  3,714   3,714 
2005  4,553   4,553 
2006  3,847   3,847 
2007  4,167   4,167 
2008  3,364   3,364 
2009  1,619   1,619 
2010  406   406 
2011  193   193 
2012  199   199 
2013  173   173 
2014  143   143 
2015  101   101 
2016  91   91 
2017  82   83 
         
Total $32,073  $32,074 

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Food and Drug Administration: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “FSPTCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of 4 categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to additionallyalso regulate cigars, pipe tobacco, e-cigarettes, vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA.

The FDA assesses tobacco product user fees on 6 cclasseslasses of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.

In August 2016, the FDA’s regulatory authority under the Tobacco Control Act (the “TCA”) was extended to all tobacco products not previously covered, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA has since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids.

Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as of February 15, 2007. There are 3 pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).

We submitted premarket filings prior to the September 9, 2020 deadline for certain of our products and intend to supplement and complete the applications within the FDA’s discretionary timeline. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must demonstrate that a new product either has the same characteristics as its predicate product or different characteristics, but does not raise different questions of public health. The FDA has indicated its enforcement priority is required underthose applicants who have received negative action on their application, such as a court orderMarketing Denial Order or Refuse to issueFile notification and who continue to illegally sell those unauthorized products, as well as products for which manufacturers failed to submit a decision related to the authorization of these products within twelve months; otherwise, these products cease to be subject to the FDA’s continued compliance policy, which allows products to be marketed pending premarket review. FDA may, in its discretion and on a case-by-case basis, deviate from this policy.marketing application.

The FDA has issued a number of proposed rules related to premarket filings; however, those rules were not finalized until afterprior to the September 9, 2020. As such, it is unclear whether2020, deadline. On October 5, 2021, the FDA finalized 2 rules related to the Substantial Equivalence process and how FDA will applythe Premarket Tobacco Product Application process, respectively, which both become effective November 4, 2021. Both Final Rules indicate that any new or additional requirements will not retroactively apply to currently pending applications.PMTAs; however, the information outlined in the rule remains important to the FDA’s substantive review of an application. We believe we have products that meet the requisite standardsRules and have filed premarket filings supporting a showing of the respective required standard.standards. However, there is no assurance that the FDA’s guidance or ultimate regulationregulations will not change, or that the FDA will review and authorize the productsnot prioritize its enforcement in the requisite time period ora manner that in that circumstance, the FDA will use its discretion on a case-by-case basis to allow for the continued marketing of the products,negatively affects our pending applications, or that unforeseen circumstances will not arise that prevent us from sufficiently supplementing or completing our applications or otherwise increase the amount of time and money we are required to spend to receive all necessary marketing orders. On September 14, 2021, the FDA issued a Marketing Denial Order (“MDO”) for certain of the Company’s proprietary e-liquid products subject of these PMTAs. The Company filed a Petition for Review in the Sixth Circuit Court of Appeals on September 23, 2021, followed by an Emergency Motion for a Stay Pending Review on September 30, 2021. On October 7, 2021, we were informed that the FDA had rescinded its September 14 MDO. We therefore withdrew both the Petition and Emergency Stay on October 8, 2021. The Rescission Letter indicated that FDA had found additional relevant information that was not adequately assessed. Although we filed many premarket applications in a timely manner, no assurance can be given that the applications will ultimately be successful. This may result in the prioritization of supplementing or completing applications for high priority SKUs in our inventory position, which could adversely impact future revenues. At the time of receipt of the MDO, the Company quarantined approximately $0.7 million in the aggregate inventories of the affected products or materials subject to the MDO, which were subsequently released, once the FDA rescinded the MDO.

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In addition, we currently distribute many third-party manufactured vapor products for which we will be completely dependent on the manufacturer complying with the premarket filing requirements. There can be no assurance that these third-party products will receive a marketing order. While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity. For a period of time after the filing deadline, we expect there to be a lack of enforcement, which may adversely affect our ability to compete in the marketplace against those who continue to sell unauthorized products.

In January 2020,On April 29, 2021, the FDA issued a Guidance document (the “January 2020 Guidance”) that stated it would be prioritizing enforcement of several categories of electronic nicotine delivery system (“ENDS”)announced plans to propose 2 tobacco product standards related to combusted tobacco products: (1) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products;a ban on menthol as a characterizing flavor in cigarettes; and (2) ENDS products for whicha ban on all characterizing flavors (including menthol) in cigars. These product standards are required to go through the manufacturer has failedformal rulemaking process where we would have the opportunity to take (or is failingcomment on the proposed rule with regard to take) adequate measures to prevent minors’ access; (3) ENDS products targeted to minors or whose marketing is likely to promote the useany impact on any of ENDS by minors; and (4) ENDS products offered for sale after May 12, 2020, premarket application deadline (later updated to reflect the September 9, 2020 filing deadline) for which the manufacturer has not submitted a premarket application. The policy outlined several factors the agency would consider in its enforcement of flavored cigars going forward but did not restrict those products as it had considered in the March 2019 Guidance proposal. our products. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket filings.

Recent Accounting Pronouncements Adopted

In December 2019, the FASB issued ASUAccounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will bebecame effective beginning in the first quarter of the Company’s fiscal year 2021. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The ASU was effective for the Company beginning in the first quarter of 2021. The ASU did not have an impact to the Company’s financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This guidance simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the convertible instrument. This guidance also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company early adopted this ASU effective January 1, 2021 using the full retrospective method of transition. The adoption resulted in a $7.1 million increase in Accumulated earnings, a $24.2 million increase in Notes payable and long-term debt, a $6.3 million decrease in deferred income taxes and a $24.9 million decrease in Additional paid-in capital as of December 31, 2020, and a $2.2 million decrease in Accumulated deficit and a $24.9 million decrease in Additional paid-in capital as of December 31, 2019. Interest expense will decrease by $6.7 million annually and weighted average diluted common shares outstanding will increase by approximately 3.2 million shares.

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Note 3. Acquisitions

Unitabac
On July 23, 2021, the Company acquired certain assets of Unitabac, a marketer of mass-market cigars, for $10.7 million in total consideration, comprised of $9.6 million in cash and $1.1 million of capitalized transaction costs. The acquisition is comprised of a portfolio of cigarillo products and all related intellectual property, including Cigarillo Non-Tip (NT) Homogenized Tobacco Leaf (HTL) products and Rolled Leaf and Natural Leaf Cigarillo Products. The transaction was accounted for as an asset purchase with $10.0 million assigned to intellectual property, which has an indefinite life, and $0.7 million assigned to inventory. The intellectual property asset is deductible for tax purposes.

Direct Value Wholesale

In April 2021, ReCreation Marketing (“ReCreation”), a VIE for which the Company is considered the primary beneficiary, purchased 100% of the equity interests of Westhem Ventures LTD d/b/a Direct Value Wholesale (“DVW”) for $3.9 million, net of cash acquired, with $3.5 million paid in cash at closing and $0.5 million in accrued consideration to be paid during 2021. DVW is a Canadian distribution entity that operates in markets not primarily served by ReCreation. The acquisition expands ReCreation’s markets in Canada. On April 13, 2021, in connection with the acquisition of DVW, the Company provided a $3.7 million unsecured loan to ReCreation bearing interest at 8% per annum and maturing April 13, 2023. The unsecured loan is eliminated in the consolidation of ReCreation. As of September 30, 2021, ReCreation had not completed the accounting for the acquisition. The following table summarizes the consideration transferred and calculation of goodwill based on excess of the acquisition price over the estimated fair value of the identifiable net assets acquired and are based on management’s preliminary estimates:

Total consideration transferred $3,462 
Adjustments to consideration transferred:    
Cash acquired  (43)
Accrued consideration  480 
Adjusted consideration transferred  3,899 
Assets acquired:    
Working capital (primarily AR and inventory)  1,342 
Fixed assets and Other long term assets  27 
Net assets acquired $1,369 
     
Goodwill $2,530 

The goodwill of $2.5 million consists of the synergies expected from combining the operations and is deductible for tax purposes.

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ReCreation Marketing

In July 2019, the Company obtained a 30% stake in a Canadian distribution entity, ReCreation, for $1 million paid at closing. In November 2020, the Company invested an additional $1 million related to our 30% stake. In November 2020, Thethe Company also invested an additional $2 million increasing its ownership interest to 50%. The Company received board seats aligned with its ownership position. The Company also provided a $2.0 million unsecured loan to ReCreation bearing interest at 8% per annum and maturing November 19, 2022. The Company has determined that ReCreation is a VIE due to its required subordinated financial support. The Company has determined it is the primary beneficiary due to its 50% equity interest, additional subordinated financing and distribution agreement with ReCreation for the sale of the Company’s products. As a result, the Company began consolidating ReCreation effective November 2020. As of March 31,September 30, 2021, the Company had not completed the accounting for the acquisition. The following table summarizes the consideration transferred and calculation of goodwill based on excess of the acquisition price over the estimated fair value of the identifiable net assets acquired and are based on management’s preliminary estimates:

Total consideration transferred $4,000 
Adjustments to consideration transferred:    
Cash acquired  (3,711)
Working capital  418 
Debt eliminated in consolidation  2,000 
Adjusted consideration transferred  2,707 
Assets acquired:    
Working capital (primarily AR and inventory)  1,551 
Fixed assets and Other long term assets  70 
Other liabilities  (203)
Non-controlling interest  (4,050)
Net assets acquired $(2,632)
     
Goodwill $5,339 

The goodwill of $5.3 million consists of the synergies expected from combining the operations and is currently not deductible for tax purposes.

In July 2021, the Company invested an additional $2.3 million in ReCreation increasing its ownership interest to 65%. The Company received board seats aligned with its ownership position. The Company has determined that ReCreation continues to be a VIE due to its required subordinated financial support. The Company has determined it remains the primary beneficiary due to its 65% equity interest, additional subordinated financing and distribution agreement with ReCreation for the sale of the Company’s products. As a result of the Company remaining the primary beneficiary, the increase in ownership interest resulted in a decrease in Non-controlling interest of $1.1 million and a decrease in Additional paid-in capital of $1.1 million

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Standard Diversified Inc. (“SDI”) Reorganization

On July 16, 2020, the Company completed its merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of the Company in a tax-free downstream merger. Under the terms of the agreement, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock at the time of the merger. SDI divested its assets, other than SDI’s TPB Common Stock, prior to close such that the net liabilities at closing were minimal and the only assets that SDI retained were the remaining TPB Common Stock holdings. The transaction was accounted for as an asset purchase for $236.0 million in consideration, comprised of 7,934,704 shares of TPB Common Stock valued at $234.3 million plus transaction costs and assumed net liabilities. The $236.0 million was assigned to the 8,178,918 shares of TPB Common Stock acquired. The 244,214 shares of TPB Common Stock acquired in excess of the shares issued were retired resulting in a charge of $1.7 million recorded in Accumulated earnings (deficit). The Company no longer has a controlling shareholder.

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Durfort Holdings

In June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for $47.7 million in total consideration, comprised of $37.7 million in cash, including $1.7 million of capitalized transaction costs, and a $10.0 million unsecured subordinated promissory note (“Promissory Note”). With this transaction, the Company acquired co-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones. The Company also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA which was effective October 9, 2020. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones. The transaction was accounted for as an asset purchase with $42.2 million assigned to intellectual property, which has an indefinite life, and $5.5 million assigned to the Master Distribution Agreement, which has a 15 year life. Both assets are currently deductible for tax purposes.

Note 4. Derivative Instruments

Foreign Currency

The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. During 2020, the Company executed various forward contracts, which met hedge accounting requirements, for the purchase of €19.7 million and sale of €21.4 million with maturity dates ranging from December 2020 to November 2021. At March 31,September 30, 2021, the Company had forward contracts for the purchase of €13.1€3.3 million and sale of €14.3 million.€3.6 million outstanding. The foreign currency contracts’ fair value at March 31,September 30, 2021, resulted in an asset of $0.10.0 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities. At December 31, 2020, the Company had forward contracts for the purchase of €18.0 million and sale of €19.6 million.million outstanding. The foreign currency contracts’ fair value at December 31, 2020, resulted in an asset of $0.4 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities.

Interest Rate Swaps

The Company’s policy is to manage interest rate risk by reducingrelating to the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fixed LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value was recorded to other comprehensive income. The Company used the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at December 31, 2020, resulted in a liability of $3.7 million included in other long-term liabilities. Losses of $0.21.0 million were reclassified into interest expense for the threenine months ended SMarch 31,eptember 30, 2020. The Company terminated the interest rate swap agreement in conjunction with the prepayment of all outstanding amounts related tounder the 2018 First Lien Credit Facility (as defined)defined below) in the first quarter of 2021 with the settlementearly termination payment made by the Company in the amount of $3.6 million which was reclassified out of accumulated other comprehensive loss into loss on extinguishment of debt.

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Note 5. Fair Value of Financial Instruments

The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents

Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.

Accounts Receivable

The fair value of accounts receivable approximates their carrying value due to their short-term nature.

Long-Term Debt

The Company’s Senior Secured Notes (as defined)defined below) bear interest at a rate of 5.625% per year and the fair value of the Senior Secured Notes approximate their carrying value of $250 million due to the recency of the notes’ issuance, related to the quarter ended March 31,September 30, 2021.

The Company’s 2018 First Lien Credit Facility bore interest at variable rates that fluctuated with market rates, the carrying values of the 2018 First Lien Credit Facility approximated its fair value. As of December 31, 2020, the fair value of the 2018 First Lien Term Loan approximated $130.0 million. The Company prepaid all outstanding amounts related tounder the 20192018 First Lien Credit Facility in the first quarter of 2021.

The Convertible Senior Notes (as defined) bear interest at a rate of 2.50% per year, and the fair value of the Convertible Senior Notes without the conversion feature approximated $156.4158.6 million, with a carrying value of $172.5 million as of March 31,September 30, 2021. As of December 31, 2020, the fair value of the Convertible Senior Notes approximated $155.3 million, with a carrying value of $172.5 million.

Note Payable – Promissory Note

The Company’s Promissory Note bore interest at a rate of 7.5% per year. The fair value of the Promissory Note approximatesapproximated its carrying value of $10.0$10.0 million at December 31, 2020, due to the recency of the note’s issuance, related to the year ended December 31, 2020. The Company prepaid all outstanding amounts under the Promissory Note in the third quarter of 2021.

Note Payable – Unsecured Loan

The Company’s Unsecured Note bears interest at a rate of 1.0% per year, and the fair value of the Unsecured Note approximated $7.4 million, with a carrying value of $7.5 million as of September 30, 2021. The fair value of the Unsecured Note approximated its carrying value of $7.5 million at December 31, 2020, due to the recency of the note’s issuance, related to the quarter ended MarchDecember 31, 2021.

2020. The Unsecured Note Payable – Unsecured Loan

was forgiven in October 2021. The fair valueextinguishment of the Unsecured Note approximates its carrying valuewill occur in the fourth quarter of $7.5 million due to the recency of the note’s issuance, related to the quarter ended March 31, 2021.2021.

See Note 11, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.

Foreign Exchange

At SMarch 31,eptember 30, 2021, the Company had forward contracts for the purchase of €13.13.3 million and sale of €14.33.6 million. The fair value of the foreign exchange contracts areis based upon quoted market prices for similar instruments, thus leading to them being categorized as level 2 instruments within the fair value hierarchy, and resulted in an asset of $0.10.0 million and a liability of $0.0 million as of MarchSeptember 31,30, 2021. At December 31, 2020, the Company had forward contracts for the purchase of €18.0 million and sale of €19.6 million resulting in an asset of $0.4 million and a liability of $0.0 million as of December 31, 2020.

Interest Rate Swaps

The Company had swap contracts for a total notional amount of $70 million at December 31, 2020. The fair values of the swap contracts were based upon quoted market prices for similar instruments, thus leading to them being categorized as level 2 instruments within the fair value hierarchy, and resulted in a liability of $3.7 million December 31, 2020. The Company terminated the swap contracts in conjunction with the prepayment of all outstanding amounts under the 2018 First Lien Credit Facility in the first quarter of 2021.

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Note 6. Inventories

Effective January 1, 2021, the Company changed its method of accounting for inventory from the LIFO method to the FIFO method. Costs determined using the LIFO method were utilized on approximately 45.1% of inventories at December 31, 2020, prior to this change in method, and consisted primarily of tobacco inventory. The Company believes the FIFO method is preferable because it: (i) conforms the accounting for all inventory with the method utilized for the majority of its inventory; (ii) better represents how management assesses and reports on the performance of the tobacco and other LIFO product lines as LIFO is excluded from management’s economic decision making; (iii) better aligns the accounting with the physical flow of that inventory; and (iv) better reflects inventory at more current costs.

The Company applied this change retrospectively to all prior periods presented. This change resulted in a $4.5 million increase in Accumulated earnings as of December 31, 2020, from $12.1 million to $16.6 million and a $4.3 million decrease in Accumulated deficit as of December 31, 2019, from $15.3 million to $11.0 million. In addition, the following financial statement line items in the Company’s Consolidated Balance Sheets as of December 31, 2020 and its Consolidated Statements of Income and Consolidated Statements of Cash Flows for the three and nine months ended March 31,September 30, 2020 were adjusted as follows:

Consolidated Statement of Income For the three months ended March 31, 2020 
  As Originally Reported  Effect of Change (a)  As Adjusted 
Cost of sales $49,258  $0  $49,258 
Income before income taxes $4,221  $0  $4,221 
Income tax expense $946  $0  $946 
Net income attributable to Turning Point Brands, Inc. $3,275  $0  $3,275 
Earnings per common share:            
Basic $0.17  $0  $0.17 
Diluted $0.16  $0  $0.16 

Consolidated Balance Sheets December 31, 2020 
  As Originally Reported  Effect of Change  As Adjusted 
Inventories $79,750  $6,106  $85,856 
Deferered income taxes $4,082  $1,584  $5,666 
Accumulated earnings (deficit) $12,058  $4,522  $16,580 
Consolidated Statement of Income 
For the three months ended
September 30, 2020
 
  As Originally Reported  Effect of LIFO Change  As Adjusted 
Cost of sales $55,867  $0  $55,867 
Income before income taxes $9,612  $0 $9,612 
Income tax expense $1,816  $0  $1,816 
Net income attributable to Turning Point Brands, Inc. $7,796  $0 $7,796 
Earnings per common share:            
Basic $0.41  $0 $0.41 
Diluted $0.40  $0 $0.40 

Consolidated Statement of Cash Flows For the three months ended March 31, 2020 
  As Originally Reported  Effect of Change (a)  As Adjusted 
Consolidated net income $3,275  $0  $3,275 
Deferred income taxes $545  $0  $545 
Inventories $1,784  $0  $1,784 

 
For the nine months ended
September 30, 2020
 
  As Originally Reported  Effect of LIFO Change  As Adjusted 
Cost of sales $161,996  $156  $162,152 
Income before income taxes $26,327  $(156) $26,171 
Income tax expense $6,029  $0  $6,029 
Net income attributable to Turning Point Brands, Inc. $20,298  $(156) $20,142 
Earnings per common share:            
Basic $1.04  $(0.01) $1.03 
Diluted $1.02  $(0.01) $1.01 

(a)There was no LIFO impact for the three months ended March 31, 2020.
Consolidated Balance Sheets December 31, 2020 
  As Originally Reported  Effect of LIFO Change  As Adjusted 
Inventories $79,750  $6,106  $85,856 
Deferred income taxes $4,082  $1,584  $5,666 
Accumulated earnings (deficit) $12,058  $4,522  $16,580 

Consolidated Statement of Cash Flows 
For the nine months ended
September 30, 2020
 
  As Originally Reported  Effect of LIFO Change  As Adjusted 
Consolidated net income $20,298  $(156) $20,142 
Deferred income taxes $876  $0  $876 
Inventories $(2,364) $156  $(2,208)

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The components of inventories are as follows:

 
March 31,
2021
  
December 31,
2020
 
Raw materials and work in process $7,519  $8,137 
Leaf tobacco  41,707   32,948 
Finished goods - Zig-Zag Products  21,477   14,903 
Finished goods - Stoker’s Products  9,777   9,727 
Finished goods - NewGen products  16,668   18,916 
Other  1,203   1,225 
Inventory $98,351  $85,856 

 
September 30,
2021
  
December 31,
2020
 
Raw materials and work in process $6,892  $8,137 
Leaf tobacco  38,151   32,948 
Finished goods - Zig-Zag Products  26,839   14,903 
Finished goods - Stoker’s Products  11,666   9,727 
Finished goods - NewGen products  13,554   18,916 
Other  1,503   1,225 
Inventories $98,605  $85,856 

The inventory valuation allowance was $9.6$6.8 million and $9.9 million as of March 31,September 30, 2021, and December 31, 2020, respectively.

Note 7. Other Current Assets

Other current assets consist of:

 
March 31,
2021
  
December 31,
2020
 
Inventory deposits $7,369  $7,113 
Insurance deposit  3,000   3,000 
Prepaid taxes  526   813 
Other  13,971   15,525 
Total $24,866  $26,451 
 
September 30,
2021
  
December 31,
2020
 
Inventory deposits $9,423  $7,113 
Insurance deposit  3,000   3,000 
Prepaid taxes  1,533   813 
Other  13,157   15,525 
Total $27,113  $26,451 

Note 8. Property, Plant, and Equipment

Property, plant, and equipment consists of:

 
March 31,
2021
  
December 31,
2020
 
Land $22  $22 
Buildings and improvements  2,750   2,750 
Leasehold improvements  4,702   4,702 
Machinery and equipment  16,499   15,612 
Furniture and fixtures  9,025   9,025 
Gross property, plant and equipment  32,998   32,111 
Accumulated depreciation  (17,350)  (16,587)
Net property, plant and equipment $15,648  $15,524 


 
September 30,
2021
  
December 31,
2020
 
Land $22  $22 
Buildings and improvements  3,069   2,750 
Leasehold improvements  4,739   4,702 
Machinery and equipment  19,352   15,612 
Furniture and fixtures  9,281   9,025 
Gross property, plant and equipment  36,463   32,111 
Accumulated depreciation  (18,867)  (16,587)
Net property, plant and equipment $17,596  $15,524 

Note 9. Other Assets

Other assets consist of:

 
March 31,
2021
  
December 31,
2020
 
Equity investments $24,016  $24,018 
Other  2,357   2,818 
Total $26,373  $26,836 


 
September 30,
2021
  
December 31,
2020
 
Equity investments $32,749  $24,018 
Debt security investment 
8,000  
0
 
Other  2,061   2,818 
Total $42,810  $26,836 


On July 21, 2021, the Company invested $8 million in Old Pal Holding Company LLC (“Old Pal”). The Company invested in the form of a convertible note which includes additional follow-on investment rights.  Old Pal is a leading brand in the cannabis lifestyle space that operates a non-plant touching licensing model. The Company’s investment will enable Old Pal to expand product offerings in existing states, which include California, Nevada, Michigan, Oklahoma, Ohio, Washington and Massachusetts, and will help create the infrastructure necessary to support continued territory and product expansion. The convertible note bears an interest rate of 3.0% per year and matures July 31, 2026. Interest and principal are payable at maturity. Old Pal has the option to extend the maturity date in one-year increments. The interest rate is subject to change based on sales levels of Old Pal meeting certain thresholds. The weighted average interest rate was 3% for the three months ended September 30, 2021. Old Pal has the option to convert the note into shares once sales reach a certain threshold. Additionally, the Company has the right to convert the note into shares at any time after January 1, 2022. The conditions required to allow Old Pal to convert the note were not met as of September 30, 2021.

On April 19, 2021, the Company invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD. The Company has additional follow-on investment rights. As part of the investment, the Company has obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products.

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Note 10. Accrued Liabilities

Accrued liabilities consist of:

 
March 31,
2021
  
December 31,
2020
 
Accrued payroll and related items $3,664  $9,459 
Customer returns and allowances  5,683   5,259 
Taxes payable  7,025   4,326 
Lease liabilities  3,269   3,228 
Accrued interest  2,924   2,096 
Other  9,280   10,857 
Total $31,845  $35,225 


 
September 30,
2021
  
December 31,
2020
 
Accrued payroll and related items $7,029  $9,459 
Customer returns and allowances  7,635   5,259 
Taxes payable  4,409   4,326 
Lease liabilities  3,159   3,228 
Accrued interest  2,837   2,096 
Other  8,280   10,857 
Total $33,349  $35,225 
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Note 11. Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of the following in order of preference:

 
March 31,
2021
  
December 31,
2020
 
Senior Secured Notes $250,000  $0 
2018 First Lien Term Loan  0   130,000 
Convertible Senior Notes  172,500   172,500 
Note payable - Promissory Note  10,000   10,000 
Note payable - Unsecured Loan  7,485   7,485 
Gross notes payable and long-term debt  439,985   319,985 
Less deferred finance charges  (10,183)  (5,873)
Less current maturities  (5,000)  (12,000)
Notes payable and long-term debt $424,802  $302,112 

 
September 30,
2021
  
December 31,
2020
 
Senior Secured Notes $250,000  $0 
2018 First Lien Term Loan  0   130,000 
Convertible Senior Notes  172,500   172,500 
Note payable - Promissory Note  0   10,000 
Note payable - Unsecured Loan  7,485   7,485 
Gross notes payable and long-term debt  429,985   319,985 
Less deferred finance charges  (8,947)  (5,873)
Less current maturities  (7,485)  (12,000)
Notes payable and long-term debt $413,553  $302,112 

Senior Secured Notes

On February 11, 2021, the Company closed a private offering (the “Offering”) of $250 million aggregate principal amount of its 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.The Company used the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

Obligations under the Senior Secured Notes are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (the “Guarantors”) that guarantee any Credit Facility (as defined in the Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”) or capital markets debt securities of the Company or Guarantors in excess of $15.0 million. The Senior Secured Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.

The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium. Thereafter, the Company may redeem the Senior Secured Notes, in whole or in part, at established redemption prices set forth in the Senior Secured Notes Indenture, plus accrued and unpaid interest, if any. In addition, on or prior to February 15, 2023, the Company may redeem up to 40% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625%, plus accrued and unpaid interest, if any to the redemption date; provided, however, that at least 50% of the original aggregate principal amount of the Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remains outstanding. In addition, at any time and from time to time prior to February 15, 2023, but not more than once in any twelve-month period, the Company may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes at a redemption price of 103% of the aggregate principal amount of Senior Secured Notes redeemed plus accrued and unpaid interest, if any to but not including the redemption date, on the Senior Secured Notes to be redeemed.

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

The Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Indenture.

The Company incurred debt issuance costs attributable to the issuance of the Senior Secured Notes of $6.4 million which are amortized to interest expense using the effective interest method over the expected life of the Senior Secured Notes.

The Indenture provides for customary events of default.

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2021 Revolving Credit Facility

In connection with the Offering, the Company also entered into a new $25 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The 2021 Revolving Credit Facility provides for a revolving line of credit of up to $25.0 million. Letters of credit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). The Company has 0t drawn any borrowings under the 2021 Revolving Credit Facility but does have letters of credit of approximately $3.6 million outstanding under the facility. The 2021 Revolving Credit Facility will mature on August 11, 2025 if none of the Company’s Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.

Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging). The Company also has the option to borrow at a rate determined by reference to the base rate.

The obligations under the 2021 Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021 Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.

The 2021 Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021 Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the 2021 Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5,000,000) in the aggregate outstanding exceeds 35% of the total commitments under the 2021 Revolving Credit Facility.

The Company incurred debt issuance costs attributable to the issuance of the 2021 Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method over the expected life of the 2021 Revolving Credit Facility.

The 2021 Revolving Credit Agreement provides for customary events of default.

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2018 Credit Facility

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

The 2018 Credit Facility contained customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2018 Credit Facility also contained certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict the ability of the Company and its subsidiary guarantors: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments. See Note 19, “Dividends and Share Repurchase”, for further information regarding dividend restrictions.

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2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bore interest at LIBOR plus a spread of 2.75% to 3.50% based on the Company’s senior leverage ratio. The 2018 First Lien Term Loan had quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility had a maturity date of March 7, 2023. The 2018 First Lien Term Loan was secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, other than certain excluded assets (the “Collateral”). In connection with the Convertible Senior Notes offering, the Company entered into a First Amendment (“the Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lender parties thereto. The Amendment was entered into primarily to permit the Company to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under the 2018 Second Lien Credit Facility and use the remaining proceeds for acquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contained certain financial covenants, which were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants included maximum senior leverage ratio of 3.00x with step-downs to 2.50x, a maximum total leverage ratio of 5.50x with step-downs to 5.00x, and a minimum fixed charge coverage ratio of 1.20x. In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of October 1, 2019 until September 30, 2020. In connection with the Amendment, fees of $0.2 million were incurred. The Company used a portion of the proceeds from the issuance of the Senior Secured Notes to prepay all outstanding amounts under and terminate the 2018 First Lien Credit Facility in the first quarter of 2021 in the amount of $130.0 million, and the transaction resulted in a $5.7 million loss on extinguishment of debt.

Convertible Senior Notes

In July 2019, the Company closed an offering of $172.5 million in aggregate principal amount of its 2.50%Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations of the Company.

The Convertible Senior Notes are convertible into approximately 3,205,8953,207,293 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of 18.58518.593 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.81$53.78 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. The conversion price is adjusted periodically as a result of dividends paid by the Company in excess of pre-determined thresholds of $0.04 per share. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of March 31,September 30, 2021.

The Company early adopted ASU 2020-06 effective January 1, 2021 on a retrospective basis to all periods presented. Under ASU 2020-06, the Company will account for the Convertible Senior Notes entirely as a liability and will no longer separately account for the Convertible Senior Notes with liability and equity components. See note 2 for further discussion of the impact of the adoption of ASU 2020-06.

The Company incurred debt issuance costs attributable to the Convertible Senior Notes of $5.9 million which are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes.

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In connection with the Convertible Senior Notes offering, the Company entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.81$53.78 per and a cap price of $82.86 per share, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $20.53 million for these capped calls at the time they were entered into and charged that amount to additional paid-in capital.

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The indenture covering the Convertible Senior Notes contains customary events of default.
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Promissory Note

On June 10, 2020, in connection with the acquisition of certain Durfort assets, the Company issued the Promissory Note in the principal amount of $10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first interest payment due September 10, 2020. The Principal Amount iswas payable in 2 $5.0 million installments, with the first installment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment iswas subject to reduction for certain amounts payable to the Company as a holdback. The Company prepaid all outstanding amounts under and terminated the Promissory Note in the third quarter of 2021 in the amount of $9.6 million. The transaction resulted in a $0.4 million gain on extinguishment of debt.

Unsecured Loan

On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020, National Tobacco Company, L.P., a subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan. The proceeds of the loan were received on April 27, 2020. The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.rate. During 2021, the Company applied for forgiveness for the loan. On October 15, 2021, the Company received notice that its application for forgiveness was fully approved. The Company anticipates that the extinguishment of the unsecured loan will occur in the fourth quarter of 2021, resulting in a gain on extinguishment of debt of $7.5 million.

Note Payable – IVG

In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note had a principal amount of $4.0 million with an interest rate of 6.0% per year and matured on March 5, 2020. All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account in the first quarter of 2020 pending agreement with the sellers of any indemnification obligations. The escrow funds were distributed in the first quarter of 2021.

Note 12. Leases

The Company’s leases consist primarily of leased property for manufacturing warehouse, head offices and retail space as well as vehicle leases. At lease inception, the Company recognizes a lease right of use asset and lease liability calculated as the present value of future minimum lease payments. In general, the Company does not recognize any renewal periods within the lease terms as there are no significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.

The components of lease expense consisted of the following:

 Three Months Ended March 31, 
  2021  2020 
Operating lease cost      
Cost of sales $225  $233 
Selling, general and administrative  752   398 
Variable lease cost (1)  205   312 
Short-term lease cost  11   83 
Sublease income  (30)  (30)
Total $1,163  $996 

 
Three Months Ended
September 30,
 

 2021
  2020
 
Operating lease cost      
Cost of sales $225  $225 
Selling, general and administrative  771
   643
 
Variable lease cost (1)  214
   96
 
Short-term lease cost  13
   11
 
Sublease income  0  (30)
Total $1,223  $945 

(1)Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.

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Nine Months Ended
September 30,
 
  2021


2020
 
Operating lease cost      
Cost of sales $682  $683 
Selling, general and administrative  2,285
   1,647
 
Variable lease cost (1)  954
   452
 
Short-term lease cost  35
   120
 
Sublease income  (60)
  (90)
Total  $3,896
   $2,812
 

 
March 31,
2021
  
December 31,
2020
 
Assets:      
Right of use assets $17,406  $17,918 
Total lease assets $17,406  $17,918 
         
Liabilities:        
Current lease liabilities (2)
 $3,269  $3,228 
Long-term lease liabilities  15,570   16,117 
Total lease liabilities $18,839  $19,345 
(1)Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.

  
September 30,
2021
  
December 31,
2020
 
Assets:      
Right of use assets $15,984  $17,918 
Total lease assets $15,984  $17,918 
         
Liabilities:        
Current lease liabilities (2)
 $3,159  $3,228 
Long-term lease liabilities 
14,201

 
16,117
 
Total lease liabilities $17,360  $19,345 

(2)Reported within accrued liabilities on the balance sheet

 As of March 31, 
  2021  2020 
Weighted-average remaining lease term  - operating leases 7.1 years  7.8 years 
Weighted-average discount rate - operating leases  4.93%  5.84%

 As of September 30, 
  2021  2020 
Weighted-average remaining lease term - operating leases 6.8 years  7.4 years 
Weighted-average discount rate - operating leases  4.93%  4.93%

Nearly all the lease contracts for the Company do not provide a readily determinable implicit interest rate. For these contracts, the Company uses a discount rate that approximates its incremental borrowing rate at the time of the lease commencement.

As of March 31,September 30, 2021, maturities of lease liabilities consisted of the following:

 
March 31,
2021
 
2021 $3,078 
2022  3,795 
2023  3,528 
2024  2,485 
2025  2,125 
Years thereafter  7,427 
Total lease payments $22,438 
Less: Imputed interest  3,599 
Present value of lease liabilities $18,839 


 
September 30,
2021
 
2021 $989 
2022  3,870 
2023  3,679 
2024  2,485 
2025  2,125 
Years thereafter  7,428 
Total lease payments $20,576 
Less: Imputed interest  3,216 
Present value of lease liabilities $17,360 

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Note 13. Income Taxes

The Company’s effective income tax rate for the three and nine months ended March 31,September 30, 2021, was 18.7%23.3% and 21.8%, respectively, which includes a discrete tax deduction of $3.3$1.0 million and $6.2 million for the three and nine months ended March 31,September 30, 2021, respectively, relating to stock option exercises. The Company’s effective income tax rate for the three and nine months ended March 31,September 30, 2020, was 23.8%20.2% and 23.7%, respectively, which includes a discrete tax deduction of $0.7$0.0 million and $0.9 million for the three and nine months ended March 31,September 30, 2020, respectively, relating to stock option exercises.

The Company follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that the Company did not have any uncertain tax positions requiring recognition under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2017.2018.

Note 14. Pension and Postretirement Benefit Plans

The Company had a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation.  The Company’s policy was to make the minimum amount of contributions that can be deducted for federal income taxes. The Company made 0 contributions to the pension plan in 2020. In October 2019, the Company elected to terminate the defined benefit pension plan, effective December 31, 2019 with final distributions made in third quarter of 2020.

The Company sponsored a defined benefit postretirement plan that covered hourly employees. This plan provided medical and dental benefits. This plan was contributory with retiree contributions adjusted annually. The Company’s policy was to make contributions equal to benefits paid during the year. In October 2019, the Company amended the plan to cease benefits effective June 30, 2020.

The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:

 Three Months Ended March 31, 
  
Pension
Benefits
  
Postretirement
Benefits
 
  2021  2020  2021  2020 
             
Service cost $0  $0  $0  $0 
Interest cost  0   95   0   0 
Expected return on plan assets  0   (161)  0   0 
Amortization of (gains) losses  0   36   0   (57)
Net periodic benefit income $0  $(30) $0  $(57)


Three Months Ended September 30, 
 
Pension
Benefits
 
Postretirement
Benefits
 
 2021 2020 2021 2020 
         
Service cost $0  $0  $0  $0 
Interest cost  0   0   0   0 
Expected return on plan assets  0   0   0   0 
Amortization of (gains) losses  0   0   0   0 
Settlement and curtailment loss
  0   1,188   0   0 
Net periodic benefit income $0  $1,188  $0  $0 


Nine Months Ended September 30, 
 
Pension
Benefits
 
Postretirement
Benefits
 
 2021 2020 2021 2020 
         
Service cost $0  $0  $0  $0 
Interest cost  0   190   0   0 
Expected return on plan assets  0   (322)  0   0 
Amortization of (gains) losses  0   72   0   (131)
Settlement and curtailment loss
  0   1,188   0   0 
Net periodic benefit income $0  $1,128  $0  $(131)

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Note 15. Share Incentive Plans

On March 22, 2021, the Company’s Board of Directors adopted the Turning Point Brands, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), subject to the approval of our shareholders, pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2021 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2021 Plan, 1,290,000 shares, plus any100,052 shares remaining available for issuance under the 2015 Equity Incentive Plan (the “2015 Plan”), of TPB Common Stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2021 Plan is scheduled to terminate on March 21, 2031. The 2021 Plan is administered by the compensation committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the awards, with such criteria to be specified in the award agreement. As of March 31,September 30, 2021, net of forfeitures, there were 0 awards8,637 Restricted Stock Units (“RSUs”) and 7,500 options granted under the 2021 Plan. There are 1,290,0001,378,711 shares plus any shares remaining available for issuance under the 2015 Plan, available for grant under the 2021 Plan. The Company intends on seeking shareholder approval of the plan at its 2021 annual meeting of shareholders. Until the 2021 Plan is approved by shareholders, no awards may be issued thereunder.

On April 28, 2016, the Board of Directors of the Company adopted the Turning Point Brands, Inc., the 2015 Plan, pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of TPB Common Stock arewere reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan iswas scheduled to terminate on April 27, 2026. The 2015 Plan iswas administered by the Committee. The Committee determinesUpon adoption of the vesting criteria for2021 Plan, the awards, with such criteria to2015 Plan was terminated, and the Company determined no additional grants would be specified in the award agreement. As of March 31, 2021, net of forfeitures, there were 16,159 shares of restricted stock, 563,911 PRSUs, and 707,878 options grantedmade under the 2015 Plan. There are 112,052 shares available for grant under the 2015 Plan. The 2015 Plan will terminate upon approval by the Company’s shareholders of the 2021 Plan. However, all awards issued under the 2015 Plan that have not been previously terminated or forfeited will remain outstanding and continue unaffected upon termination ofunaffected. There are 0 shares available for grant under the plan.2015 Plan.

On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected.

There are 0 shares available for grant under the 2006 Plan.

Stock option activity for the 2006, 2015 and 20152021 Plans is summarized below:

 
Stock
Option
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Grant Date
Fair Value
 
Outstanding, December 31, 2019  696,716  $18.13  $6.17 
             
Granted  155,000   14.85   4.41 
Exercised  (135,146)  6.37   2.74 
Forfeited  (5,510)  27.25   8.64 
Outstanding, December 31, 2020
  711,060   19.58   6.42 
             
Granted  100,000   51.75   13.77 
Exercised  (74,615)  5.70   2.66 
Forfeited  (850)  21.63   6.15 
Outstanding, March 31, 2021
  735,595  $25.36  $7.80 

 
Stock
Option
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Grant Date
Fair Value
 
Outstanding, December 31, 2019  696,716  $18.13  $6.17 
             
Granted  155,000   14.85   4.41 
Exercised  (135,146)  6.37   2.74 
Forfeited  (5,510)  27.25   8.64 
Outstanding, December 31, 2020
  711,060   19.58   6.42 
             
Granted  119,500   50.93   13.58 
Exercised  (202,768)  10.22   6.35 
Forfeited  (5,749)  31.61   9.44 
Outstanding, September 30, 2021
  622,043  $28.54  $8.70 

Under the 2006, 2015 and 20152021 Plans, the total intrinsic value of options exercised during the threenine months ended March 31,September 30, 2021 and 2020, was $3.3$7.9 million, and $0.9 million, respectively.

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At March 31,2021,September 30, 2021, under the 2006 Plan, the outstanding stock options’ exercise price for 133,61287,340 options is $3.83 per share, all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options with an exercise price of $3.83 is approximately 2.892.67 years. The Company estimates the expected life of these stock options is ten years from the date of grant. For the $3.83 per share options, the weighted average fair value of options at the date of grant was determined using the Black-Scholes model assumingwith the following assumptions a ten-year life from grant date, a current share price and exercise price of $3.83, a risk-free interest rate of 3.57%, volatility of 40%, and 0 assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.

At March 31,September 30, 2021, under the 2015 Plan,and 2021 Plans, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.

The following table outlines the assumptions based on the number of options granted under the 2015 Plan.

 
February 10,
2017
  
May 17,
2017
  
March 7,
2018
  
March 13,
2018
  
March 20,
2019
  
October 24,
2019
  
March 18,
2020
  
February 18,
2021
 
Number of options granted  40,000   93,819   98,100   26,000   155,780   25,000   155,000   100,000 
Options outstanding at March 31, 2021
  27,050   54,183   77,967   26,000   144,134   25,000   147,799   99,850 
Number exercisable at March 31, 2021
  27,050   54,183   77,967   26,000   96,076   16,750   47,413   0 
Exercise price $13.00  $15.41  $21.21  $21.49  $47.58  $20.89  $14.85  $51.75 
Remaining lives  5.87   6.13   6.94   6.96   7.98   8.57   8.97   9.89 
Risk free interest rate  1.89%  1.76%  2.65%  2.62%  2.34%  1.58%  0.79%  0.56%
Expected volatility  27.44%  26.92%  28.76%  28.76%  30.95%  31.93%  35.72%  28.69%
Expected life  6.000   6.000   6.000   5.495   6.000   6.000   6.000   6.000 
Dividend yield  0   0   0.83%  0.82%  0.42%  0.95%  1.49%  0.55%
Fair value at grant date $3.98  $4.60  $6.37  $6.18  $15.63  $6.27  $4.41  $13.77 

 
February 10,
2017
  
May 17,
2017
  
March 7,
2018
  
March 20,
2019
  
October 24,
2019
  
March 18,
2020
  
   February 18,
2021
  
May 3,
2021
 
Number of options granted  40,000   93,819   98,100   155,780   25,000   155,000   100,000   12,000 
Options outstanding at September 30, 2021
  27,050   47,483   67,417   142,284   25,000   107,219   98,750   12,000 
Number exercisable at September 30, 2021
  27,050   47,483   67,417   110,015   16,750   33,167   9,500   0 
Exercise price $13.00  $15.41  $21.21  $47.58  $20.89  $14.85  $51.75  $47.76 
Remaining lives  5.37   5.63   6.44   7.47   8.07   8.47   9.39   9.59 
Risk free interest rate  1.89%  1.76%  2.65%  2.34%  1.58%  0.79%  0.56%  0.84%
Expected volatility  27.44%  26.92%  28.76%  30.95%  31.93%  35.72%  28.69%  29.03%
Expected life  6.000   6.000   6.000   6.000   6.000   6.000   6.000   6.000 
Dividend yield  0   0   0.83%  0.42%  0.95%  1.49%  0.55%  0.59%
Fair value at grant date $3.98  $4.60  $6.37  $15.63  $6.27  $4.41  $13.77  $13.06 

The following table outlines the assumptions based on the number of options granted under the 2021 Plan.

  
May 17,
2021
 
Number of options granted  7,500 
Options outstanding at September 30, 2021
  7,500 
Number exercisable at September 30, 2021
  0 
Exercise price $45.05 
Remaining lives  9.63 
Risk free interest rate  0.84%
Expected volatility  31.50%
Expected life  6.000 
Dividend yield  0.63%
Fair value at grant date $13.23 

The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.3 million and $0.20.3 million for the three months ended March 31,September 30, 2021 and 2020, respectively. The Company recorded compensation expense related to the options of approximately $2.0 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively. Total unrecognized compensation expense related to options at March 31,September 30, 2021, is $1.71.0 million, which will be expensed over 2.362.06 years.

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Table of Contents
Performance-Based Restricted Stock Units

PRSUsPerformance-Based Restricted Stock Units (“PRSUs”) are restricted stock units subject to both performance-based and service-based vesting conditions. The number of shares of TPB Common Stock a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period. PRSUs will vest on the measurement date, which is no more than 65 days after the performance period provided the applicable service and performance conditions are satisfied. As of March 31,September 30, 2021, there are 563,911561,211 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of March 31,September 30, 2021.

 
March 31,
2017
  
March 7,
2018
  
March 20,
2019
  
March 20,
2019
  
July 19,
2019
  
March 18,
2020
  
December 28,
2020
  
February 18,
2021
 
Number of PRSUs granted  94,000   96,000   92,500   4,901   88,582   94,000   88,169   100,000 
PRSUs outstanding at March 31, 2021
  83,000   93,000   85,250   0   21,342   93,350   88,169   99,800 
Fair value as of grant date $15.60  $21.21  $47.58  $47.58  $52.15  $14.85  $46.42  $51.75 
Remaining lives  0.75   1.75   2.75   -   1.75   3.75   2.75   4.75 

 
March 31,
2017
  
March 7,
2018
  
March 20,
2019
  
March 20,
2019
  
July 19,
2019
  
March 18,
2020
  
    December 28,
2020
  
   February 18,
2021
 
Number of PRSUs granted  94,000   96,000   92,500   4,901   88,582   94,000   88,169   100,000 
PRSUs outstanding at September 30, 2021
  83,000   93,000   84,600   0   21,342   92,400   88,169   98,700 
Fair value as of grant date $15.60  $21.21  $47.58  $47.58  $52.15  $14.85  $46.42  $51.75 
Remaining lives  0.25   1.25   2.25   -   1.25   3.25   2.25   4.25 

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Table of Contents
The Company recorded compensation expense related to the PRSUs of approximately $1.21.3 million and $0.20.4 million in the consolidated statements of income for the three months ended March 31,2021September 30, 2021 and 2020, respectively, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately $3.9 million and $1.1 million in the consolidated statements of income for the nine months ended September 30, 2021 and 2020, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31,September 30, 2021, is $12.69.9 million which will be expensed over the service periods based on the probability of achieving the performance condition.

Note 16. Contingencies

On October 9, 2020, a purported stockholder of Turning Point Brands, Inc., Paul-Emile Berteau, filed a complaint in the Delaware Court of Chancery relating to the merger of SDI with a TPB subsidiary of the Company pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub (the “SDI Merger”).Sub. The complaint assertspurports to assert 2 derivative counts purportedly on behalf of TPB for breachesbreach of fiduciary duty on TPB’s behalf and against the TPB Board of Directors of Turning Point Brands, Inc. and other parties.certain SDI affiliates. The third count assertspurports to assert a direct claim against the CompanyTPB and its Board of Directors seeking a declarationbased on allegations that TPB’s Amended and Restated Bylaws are inconsistent with TPB’s certificate of incorporation. On October 26,2020, the TPB Board of Directors adopted Amendment No. 1 to TPB’s Amended and Restated Bylaws, which amended the challenged section of the bylaws. On June 30,2021, the court granted in part and denied in part the defendants’ motions to dismiss. Among other things, the court dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the plaintiff’s complaint as moot. The remaining defendants answered the complaint on August 23,2021.While the Company believes it has good and valid defenses to the claims, there can be no assurance that the Company will prevail in this case, and it could have a material adverse effect on the Company’s business and results of operations.

Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and, if such a claim were brought against the Company, could have a material adverse effect on our business and results of operations. The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or consumption of e-liquids and may be subject to claims in the future relating to other NewGen products. The Company is still evaluating these claims and the potential defenses to them. For example, the Company did not design or manufacture the products at issue; rather, the Company was merely the distributor. Nonetheless, there can be no assurance that the Company will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.Company.

We have several subsidiaries engaged in making, distributing, and selling vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. We expect that our subsidiaries will be subject to some such cases and investigative requests. In the acquisition of the vapor businesses, we negotiated financial “hold-backs”, which we expect to be able to use to defray expenses associated with the information production and the cost of defending any such lawsuits as well as the franchisee lawsuit. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal defenses against claims that they unfairly marketed vapor products.

32
We have 2 franchisor subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from time to time responding parties to arbitration demands brought by franchisees. NaN of our subsidiaries, which we acquired in 2018, is the franchisor of the VaporFi system. This subsidiary is a responding party in an arbitration brought by a former franchisee claiming, among other things, violations of Federal Trade Commission Rules and Florida law. These allegations relate to the franchise disclosure document (FDD) utilized by the franchise system, a small vapor store chain, prior to our acquisition of the chain in 2018. We believe that we have good and valid substantive defenses against these claims and will vigorously defend ourselves in the arbitration.

We have also been named in a lawsuit brought by a different former franchisee represented by the same firm that represents the plaintiff in the action described above. This case relates to the termination of the franchise agreement by the franchisor for failure to pay franchising fees and our subsequent demand that the franchisee cease using our marks and de-image locations formerly housing the franchises. The franchisee filed suit against us in the U.S. District Court for the Southern District of Florida sixteen months after our demand. The franchisee is claiming tortious interference and conversion. We believe that the suit was improperly brought before the U.S. District Court for the South District of Florida because the related franchising agreements included a mandatory arbitration clause. We also believe we have good and valid substantive defenses against the claims and intend on vigorously defending our interests in this matter.

29

Note 17. Income Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:

 Three Months Ended March 31, 
  2021  2020 
  Income  Shares  
Per
Share
  Income  Shares  
Per
Share
 
Basic EPS:                  
Numerator                  
Net income attributable to Turning Point Brands, Inc. $11,783        $4,499       
                     
Denominator                    
Weighted average      19,093,961  $0.62       19,689,446  $0.23 
                         
Diluted EPS:                        
Numerator                        
Net income attributable to Turning Point Brands, Inc. $11,783          $4,499         
Interest expense related to Convertible Senior Notes, net of tax  1,054           0         
Diluted net income attributable to Turning Point Brands. Inc. $12,837          $4,499         
                         
Denominator                        
Basic weighted average      19,093,961           19,689,446     
Convertible Senior Notes      3,205,895           0     
Stock options      365,211           417,354     
       22,665,067  $0.57       20,106,800  $0.22 

For the three months ended March 31, 2020, the effect of the 3,202,808 shares issuable upon conversion of the Convertible Senior Notes were excluded from the diluted net income per share calculation because the effect would have been antidilutive.


 Three Months Ended September 30, 
  2021  2020 
  Income  Shares  
Per
Share
  Income  Shares  
Per
Share
 
Basic EPS:                  
Numerator                  
Net income attributable to Turning Point Brands, Inc. $13,468        $9,020       
                     
Denominator                    
Weighted average      18,897,974  $0.71       19,240,187  $0.47 
                         
Diluted EPS:                        
Numerator                        
Net income attributable to Turning Point Brands, Inc. $13,468          $9,020         
Interest expense related to Convertible Senior Notes, net of tax  1,054           1,047         
Diluted net income attributable to Turning Point Brands. Inc. $14,522          $10,067         
                         
Denominator                        
Basic weighted average      18,897,974           19,240,187     
Convertible Senior Notes      3,207,293           3,202,808     
Stock options      259,540           396,802     
       22,364,807  $0.65       22,839,797  $0.44 

33

 Nine Months Ended September 30, 
  2021  2020 
  Income  Shares  
Per
Share
  Income  Shares  
Per
Share
 
Basic EPS:                  
Numerator                  
Net income attributable to Turning Point Brands, Inc. $40,605        $23,814       
                     
Denominator                    
Weighted average      18,988,435  $2.14       19,478,297  $1.22 
                         
Diluted EPS:                        
Numerator                        
Net income attributable to Turning Point Brands, Inc. $40,605          $23,814         
Interest expense related to Convertible Senior Notes  3,162           3,141         
Diluted net income attributable to Turning Point Brands. Inc. $43,767          $26,955         
                         
Denominator                        
Basic weighted average      18,988,435           19,478,297     
Convertible Senior Notes      3,207,293           3,202,808     
Stock options      268,814           380,394     
       22,464,542  $1.95       23,061,499  $1.17 

Note 18. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has 3 reportable segments: (1) Zig-Zag Products; (2) Stoker’s Products; and (3) NewGen Products. The Zig-Zag Products segment markets and distributes (a) rolling papers, tubes, and related products; and (b) finished cigars and MYO cigar wraps. The Stoker’s Products segment (a) manufactures and markets moist snuff and (b) contracts for and markets loose leaf chewing tobacco products. The NewGen Products segment (a) markets and distributes CBD, liquid vapor products and certain other products without tobacco and/or nicotine; (b) distributes a wide assortment of products to non-traditional retail outlets via VaporBeast; and (c) markets and distributes a wide assortment of products to individual consumers via the VaporFi B2C online platform. Products in the Zig-Zag Products and Stoker’s Products segments are distributed primarily through wholesale distributors in the United States while products in the NewGen Products segment are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the United States. The Other segment includes the costs and assets of the Company not assigned to one of the 3 reportable segments such as intercompany transfers, deferred taxes, deferred financing fees, and investments in subsidiaries.

The accounting policies of these segments are the same as those of the Company. Corporate costs are not directly charged to the 3three reportable segments in the ordinary course of operations. The Company evaluates the performance of its segments and allocates resources to them based on operating income.


30
34
The tables below present financial information about reported segments:

 
Three Months Ended
March 31,
 
  2021  2020 
Net sales      
Zig-Zag products $41,004  $28,914 
Stoker’s products  29,255   26,495 
NewGen products  37,382   35,280 
Total $107,641  $90,689 
         
Gross profit        
Zig-Zag products $24,896  $16,132 
Stoker’s products  15,892   13,874 
NewGen products  12,473   11,425 
Total $53,261  $41,431 
         
Operating income (loss)        
Zig-Zag products $19,437  $12,417 
Stoker’s products  12,255   9,746 
NewGen products  2,006   477 
Corporate unallocated (1)(2)
  (9,349)  (13,603)
Total $24,349  $9,037 
         
Interest expense, net  4,486   3,309 
Investment income  (25)  (91)
Loss on extinguishment of debt  5,706   0 
Net periodic income, excluding service cost  0   (87)
         
Income before income taxes $14,182  $5,906 
         
Capital expenditures        
Zig-Zag products $0  $0 
Stoker’s products  840   860 
NewGen products  2   17 
Total $842  $877 
         
Depreciation and amortization        
Zig-Zag products $114  $0 
Stoker’s products  635   519 
NewGen products  516   757 
Total $1,265  $1,276 

 
Three Months Ended
September 30,
 
  2021  2020 
Net sales      
Zig-Zag products $42,234  $35,973 
Stoker’s products  30,472   29,764 
NewGen products  37,198   38,437 
Total $109,904  $104,174 
         
Gross profit        
Zig-Zag products $23,703  $21,263 
Stoker’s products  17,104   16,042 
NewGen products  13,462   11,002 
Total $54,269  $48,307 
         
Operating income (loss)        
Zig-Zag products $17,122  $16,827 
Stoker’s products  13,305   11,466 
NewGen products  2,027   745 
Corporate unallocated (1)(2)(3)
  (10,079)  (13,017)
Total $22,375  $16,021 
         
Interest expense, net  5,397   3,539 
Investment income  (157)  (3)
Gain on extinguishment of debt  (375)  0 
Net periodic income, excluding service cost  0   1,188
         
Income before income taxes $17,510  $11,297 
         
Capital expenditures        
Zig-Zag products $12  $0 
Stoker’s products  2,209   1,450 
NewGen products  2   14 
Total $2,223  $1,464 
         
Depreciation and amortization        
Zig-Zag products $90  $91 
Stoker’s products  638   562 
NewGen products  516   633 
Total $1,244  $1,286 

(1)
Includes corporate costs that are not allocated to any of the 3 reportable segments.
(2)
Includes costs related to PMTA of $5.3 million in 2020.
(3)
Shipping costs are included in the applicable operating segment and not in Corporate unallocated.

35

 
Nine Months Ended
September 30,
 
  2021  2020 
Net sales      
Zig-Zag products $130,440  $92,290 
Stoker’s products  93,096   87,081 
NewGen products  116,652   120,455 
Total $340,188  $299,826 
         
Gross profit        
Zig-Zag products $76,342  $53,066 
Stoker’s products  51,142   46,424 
NewGen products  40,019   38,184 
Total $167,503  $137,674 
         
Operating income (loss)        
Zig-Zag products $57,897  $41,471 
Stoker’s products  39,386   33,296 
NewGen products  5,690   4,493 
Corporate unallocated (1)(2)(3)
  (31,370)  (37,022)
Total $71,603  $42,238 
         
Interest expense, net  15,406   10,143 
Investment income  (292)  (128)
Loss on extinguishment of debt  5,331   0 
Net periodic income, excluding service cost  0   997
         
Income before income taxes $51,158  $31,226 
         
Capital expenditures        
Zig-Zag products $110  $0 
Stoker’s products  4,226   3,148 
NewGen products  55   272 
Total $4,391  $3,420 
         
Depreciation and amortization        
Zig-Zag products $297  $91 
Stoker’s products  1,901   1,605 
NewGen products  1,546   2,090 
Total $3,744  $3,786 

(1)
Includes corporate costs that are not allocated to any of the 3 reportable segments.
(2)
Includes costs related to PMTA of $5.9$14.4 million in 2020.
(3)Shipping costs are included in the applicable operating segment and not in Corporate unallocated.

31
36

 
September 30,
2021
  
December 31,
2020
 
Assets      
Zig-Zag products $230,291  $206,900 
Stoker’s products  151,494   133,016 
NewGen products  80,868   91,116 
Corporate unallocated (1)
  161,068   65,017 
Total $623,721  $496,049 

 
March 31,
2021
  
December 31,
2020
 
Assets      
Zig-Zag products $212,400  $206,900 
Stoker’s products  148,093   133,016 
NewGen products  91,616   91,116 
Corporate unallocated (1)
  175,196   65,017 
Total $627,305  $496,049 

(1)
Includes assets not assigned to the 3 reportable segments. All goodwill has been allocated to the reportable segments.

Revenue Disaggregation—Sales Channel

Revenues of the Zig-Zag Products and Stoker’s Products segments are primarily comprised of sales made to wholesalers while NewGen sales are made business to business and business to consumer, both online and through our corporate retail stores. NewGen net sales are broken out by sales channel below.

 NewGen Segment 
  
Three Months Ended
March 31,
 
  2021  2020 
Business to Business $27,257  $25,278 
Business to Consumer - Online  10,033   8,134 
Business to Consumer - Corporate store  0   1,794 
Other  92   74 
Total $37,382  $35,280 

 NewGen Segment 
  
Three Months Ended
September 30,
 
  2021  2020 
Business to Business $27,169  $26,080 
Business to Consumer - Online  9,959   10,880 
Business to Consumer - Corporate store  0   1,389 
Other  70   88 
Total $37,198  $38,437 


 NewGen Segment 
  
Nine Months Ended
September 30,
 
  2021  2020 
Business to Business $85,141  $81,727 
Business to Consumer - Online  31,255   34,066 
Business to Consumer - Corporate store  0   4,500 
Other  256   162 
Total $116,652  $120,455 

37
Net Sales—Domestic vs. Foreign

The following table shows a breakdown of consolidated net sales between domestic and foreign customers.

 
Three Months Ended
March 31,
 
  2021  2020 
Domestic $100,127  $87,568 
Foreign  7,514   3,121 
Total $107,641  $90,689 


 
Three Months Ended
September 30,
 
  2021  2020 
Domestic $102,255  $100,492 
Foreign  7,649   3,682 
Total $109,904  $104,174 
32

 
Nine Months Ended
September 30,
 
  2021  2020 
Domestic $318,166  $290,050 
Foreign  22,022   9,776 
Total $340,188  $299,826 

Table of Contents
Note 19. Dividends and Share Repurchase

The most recent dividend of $0.055 per common share was paid on April 9,October 8, 2021, to shareholders of record at the close of business on March 19,September 17, 2021.

Dividends are considered restricted payments under the Senior Secured Notes Indenture and Revolving Credit Facility. The Company is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, the Company is not in default on its debt covenants. Additional earnings and market capitalization restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year.

On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The program is subject to the ongoing discretion of the Board. The total number of shares repurchased for the three months ended March 31,September 30, 2021, was 119,031125,000 shares for a total cost of $5.7$6.4 million and an average price per share of $48.16. $34.1$51.16. $19.3 million remains available for share repurchases under the program at March 31,September 30, 2021.

Note 20. Subsequent Events

On April 19,During 2021, the Company invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD.applied for forgiveness of its unsecured loan under CARES. On October 15, 2021, the Company received notice that its application for forgiveness was fully approved. The Company has additional follow-on investment rights. As partanticipates that the extinguishment of the investment,unsecured loan will occur in the Company has obtained exclusive U.S. distribution rights for Docklight’s fourth quarter of 2021, resulting in a gain on extinguishment of debt of $7.5 million.

Marley38™ CBD topical products.

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the historical financial condition and results of operations in conjunction with our historical consolidated financial statements and accompanying notes, which are included elsewhere in this Quarterly Report on Form 10-Q. In addition, this discussion includes forward-looking statements subject to risks and uncertainties that may result in actual results differing from statements we make. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that could cause actual results to differ include those risks and uncertainties discussed in “Risk Factors.”

The following discussion relates to the unaudited financial statements of Turning Point Brands, Inc., included elsewhere in this Quarterly Report on Form 10-Q. In this discussion, unless the context requires otherwise, references to “our Company” “we,” “our,” or “us” refer to Turning Point Brands, Inc., and its consolidated subsidiaries. References to “TPB” refer to Turning Point Brands, Inc., without any of its subsidiaries. We were incorporated in 2004 under the name North Atlantic Holding Company, Inc. On November 4, 2015, we changed our name to Turning Point Brands, Inc. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

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 low double-digit consumer unit growth in 2020 as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and information company. Our three focus segments are led by our core, proprietary brands: Zig-Zag® in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; and Nu-XTM, Solace® along with our distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) in the NewGen Products segment. Our businesses generate solid cash flow which we use to finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We currently ship to approximately 800 distributors with an additional 200 secondary, indirect wholesalers in the U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

We have identified additional growth opportunities in the emerging alternatives market. In January 2019, we established Nu-X Ventures LLC (“Nu-X”), a new wholly owned subsidiary dedicated to the development, production and sale of alternative products and acquisitions in related spaces. The creation of Nu-X allows us to leverage our expertise in traditional OTP management to alternative products. Our management team has extensive experience navigating federal, state and local regulations that are directly applicable to the growing alternatives market. In July 2019, we acquired the assets of Solace Technology (“Solace”). Solace is an innovative product development company which established one of the top e-liquid brands and has since grown into a leader in alternative products. Solace’s legacy and innovation enhanced Nu-X’s strong and nimble development engine.

We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories. As of December 31, 2020, our products are available in approximately 190,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 210,000 points of distribution. Our sales team targets widespread distribution to all traditional retail channels, including convenience stores, and we have a growing e-commerce business.

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Products

We operate in three segments: Zig-Zag Products, Stoker’s Products and NewGen Products. In our Zig-Zag Products segment, we principally market and distribute (i) rolling papers, tubes, and related products; and (ii) finished cigars and make-your-own (“MYO”) cigar wraps. In our Stoker’s Products segment, we (i) manufacture and market moist snuff tobacco (“MST”) and (ii) contract for and market loose leaf chewing tobacco products. In our NewGen Products segment, we (i) market and distribute CBD, liquid vapor products and certain other products without tobacco and/or nicotine; (ii) distribute a wide assortment of products to non-traditional retail via VaporBeast;  and (iii) market and distribute a wide assortment of products to individual consumers via the VaporFi B2C online platform.

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Table of Contents
Operations

Our core Zig-Zag Products and Stoker’s Products segments primarily generate revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations. In our NewGen Products segment, our acquisition of VaporBeast in 2016 expanded our revenue streams as we began selling directly to non-traditional retail outlets. Our acquisition of IVG in 2018 enhanced our B2C revenue stream with the addition of the Vapor-Fi online platform. The acquisition of Solace provided us with a line of leading liquids and a powerful new product development platform. Our net sales, which include federal excise taxes, consist of gross sales net of cash discounts, returns, and selling and marketing allowances.

We rely on long-standing relationships with high-quality, established manufacturers to provide the majority of our produced products. More than 80% of our production, as measured by net sales, is outsourced to suppliers. The remaining production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky. Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products which we produce in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of salaried personnel. Our other principal expenses include interest expense and other expenses.

Key Factors Affecting Our Results of Operations

We consider the following to be the key factors affecting our results of operations:

Our ability to further penetrate markets with our existing products;
Our ability to introduce new products and product lines that complement our core business;
Decreasing interest in some tobacco products among consumers;
Price sensitivity in our end-markets;
Marketing and promotional initiatives, which cause variability in our results;
General economic conditions, including consumer access to disposable income;
Freight and shipping costs and the availability of adequate freight for our shipments;
Cost and increasing regulation of promotional and advertising activities;
Cost of complying with regulation, including the “deeming regulations”;
Counterfeit and other illegal products in our end-markets;
Currency fluctuations;
Our ability to identify attractive acquisition opportunities; and
Our ability to integrate acquisitions.

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Recent Developments

Share Repurchase Authorization Increase

On October 25, 2021, the Board of Directors of Turning Point Brands increased the Company’s share repurchase authorization by $30.7 million to an aggregate amount of $50.0 million, including approximately $19.3 million available for repurchases under the Board’s previous authorization approved on February 25, 2020.

The repurchase authorization permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan or other arrangements. The timing, manner, price and amount of any repurchases will be determined by the Company’s management in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The repurchase authorization does not obligate the Company to purchase any specific number of shares and may be suspended or discontinued at any time.

Final Rule Related to PACT Act Published

On October 21, 2021, the United States Postal Service (“USPS”) published a Final Rule entitled “Treatment of E-Cigarettes in the Mail,” which followed its earlier publication of the Proposed Rule on February 19, 2021. This Final Rule was required as a result of the inclusion of Division FF, Title VI (Preventing Online Sales of E-Cigarettes to Children or “POSECA”) in the Further Consolidated Appropriations Act, 2021. POSECA, among other things, expanded the definition of “cigarettes” in the Jenkins Act and Prevent All Cigarette Trafficking (“PACT”) Act to expressly capture “electronic nicotine delivery systems,” i.e., ENDS. Consistent with the Proposed Rule, the Final Rule extends the existing prohibition on and exceptions to the mailing of “cigarettes” via USPS to ENDS products, other than the Consumer Testing and Public Health exceptions. Specifically, the Final Rule extends the following exceptions to the prohibition on mailing of ENDS products: the Business/Regulatory Purposes Exception, the Certain Individuals Exception, and the exception for intra-Alaska and intra-Hawaii shipments. While the Final Rule is largely in line with our expectations, we expect a transition period as we adjust our logistics.

Unitabac

On July 23, 2021, we acquired certain assets of Unitabac, a marketer of mass-market cigars, for $10.7 million in total consideration, comprised of $9.6 million in cash and $1.1 million of capitalized transaction costs. The acquisition is comprised of a robust portfolio of cigarillo products and all related intellectual property, including Cigarillo Non-Tip (NT) Homogenized Tobacco Leaf (HTL) products and Rolled Leaf and Natural Leaf Cigarillo Products.

Old Pal

On July 21, 2021, we invested $8 million in Old Pal Holding Company LLC (“Old Pal”), a leading brand in the cannabis lifestyle space. We invested in the form of a convertible note which includes additional follow-on investment rights. Old Pal is a leading brand in the cannabis space that operates a non-plant touching licensing model. Our investment will enable Old Pal to expand product offerings in existing states, which include California, Nevada, Michigan, Oklahoma, Ohio, Washington and Massachusetts, and will help create the infrastructure necessary to support continued territory and product expansion.
Direct Value Wholesale
In April 2021, ReCreation Marketing (“ReCreation”), a VIE for which we are considered the primary beneficiary, purchased 100% of the equity interest of Westhem Ventures LTD d/b/a Direct Value Wholesale (“DVW”) for $3.9 million satisfied through $3.5 million paid in cash and $0.5 million in accrued consideration to be paid during 2021. DVW is Canadian distribution entity that operates in markets not primarily served by ReCreation. The acquisition expands ReCreation’s markets in Canada.
Docklight Brands, Inc.
On April 19, 2021, we invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD. We have additional follow-on investment rights. As part of the investment, we have obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products.
Senior Secured Notes and 2021 Revolving Credit Facility

On February 11, 2021, we closed a private offering (the “Offering”) of $250 million aggregate principal amount of our 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. In connection with the Offering, we also entered into a new $25 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The 2021 Revolving Credit Facility provides for a revolving line of credit of up to $25.0 million. We used a portion of the proceeds from the issuance of the Senior Secured Notes to prepay all outstanding amounts under and terminate the 2018 First Lien Credit Facility in the first quarter of 2021 in the amount of $130.0 million, and the transaction resulted in a $5.7 million loss on extinguishment of debt. Refer to the “Long-Term Debt” section for a more complete description of our Senior Secured Notes and 2021 Revolving Credit Facility.

Docklight Brands, Inc.
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On April 19, 2020, we invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD. We have additional follow-on investment rights. As part of the investment, we have obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products.

COVID-19 Impact

As a result of the extraordinary situation we are facing, our focus is on the safety and well-being of our colleagues and the communities and customers we serve. As an organization, we have implemented several changes to enhance safety and mitigate health risk in our work environment. For our warehouse and manufacturing operations, these include split shifts, temperature scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization. These changes resulted in higher operational costs related to maintaining a safer work environment and fulfilling orders.

We canceled all unnecessary travel and facilitated telecommuting where possible. Like many companies, we have changed the way we communicate through increased use of videoconferencing and have implemented tele-selling initiatives through our sales force. Some of these changes that are proving to be efficient are likely to remain in-place even after this crisis and lead to on-going cost savings. We have also put a hold on new spending commitments as we cautiously manage through this environment.

We hired additional employees in our Louisville facility and implemented temporary wage increases for our hourly employees to meet increased demand. We shifted production capacity to manufacture hand sanitizers and have donated bottles to hospitals, nursing homes and first responders in our local communities.

COVID-19 may impact our results. Our third-party cigar wrap manufacturer in the Dominican Republic was temporarily shut down. Our supply chain has remained operational otherwise. Select budgeted annual price increases will be delayed. Our B2C platforms have seen elevated sales levels from consumer shifts to online purchasing, and we gained market share. We continue to monitor this challenging environment closely and will make necessary adjustments as needed to make sure we are serving our employees and customers, while also protecting the safety of employees and communities.

Premarket Tobacco Applications

We submitted Premarket Tobacco Applications (“PMTAs”) covering 250 products to the FDA prior to the September 9, 2020 filing deadline. The PMTAs cover a broad assortment of products in the vapor category including multiple proprietary e-liquid offerings in varying nicotine strengths, technologies and sizes; proprietary replacement parts and components of open system tank devices through partnerships with two leading manufacturers for exclusive distribution of products in the United States; and a closed system e-cigarette.e-cigarette, covering $0.7 million of inventory that was quarantined as of September 30, 2021. On September 14, 2021, the FDA issued a Marketing Denial Order (“MDO”) for certain of the Company’s proprietary e-liquid products subject of these PMTAs. The Company filed a Petition for Review in the Sixth Circuit Court of Appeals on September 23, 2021, followed by an Emergency Motion for a Stay Pending Review on September 30, 2021. On October 7, 2021, we were informed that the FDA had rescinded its September 14 MDO. We therefore withdrew both the Petition and Emergency Stay on October 8, 2021. The Rescission Letter indicated that the FDA had found additional relevant information that was not adequately assessed.  The Rescission Letter further clarified that the FDA presently has no intention of initiating any regulatory enforcement action against the products.

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Critical Accounting Policies and Uses of Estimates

Inventories

Inventories are stated at the lower of cost or net realizable value. Effective January 1, 2021, the Company changed its method of accounting for inventory using the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. The Company applied this change retrospectively to all prior periods presented, which is discussed further in Note 6, “Inventories” in the Notes to the Consolidated Financial Statements included in this Quarterly Report. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.

There have been no other material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Annual Report on Form 10-K.

Recent Accounting Pronouncements

Refer to Note 2, “Summary of Significant Accounting Policies,” of Notes to Consolidated Financial Statements included in this Quarterly Report for a description of recently issued accounting pronouncements, including those recently adopted.

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Results of Operations

Comparison of the Three Months Ended March 31,September 30, 2021, to the Three Months Ended March 31,September 30, 2020

The table and discussion set forth below displays our consolidated results of operations (in thousands):

  Three Months Ended March 31, 
  2021  2020  % Change 
Consolidated Results of Operations Data:         
Net sales         
Zig-Zag products $41,004  $28,914   41.8%
Stoker’s products  29,255   26,495   10.4%
NewGen products  37,382   35,280   6.0%
Total net sales  107,641   90,689   18.7%
Cost of sales  54,380   49,258   10.4%
Gross profit            
Zig-Zag products  24,896   16,132   54.3%
Stoker’s products  15,892   13,874   14.5%
NewGen products  12,473   11,425   9.2%
Total gross profit  53,261   41,431   28.6%
             
Selling, general, and administrative expenses  28,912   32,394   -10.7%
Operating income  24,349   9,037   169.4%
Interest expense, net  4,486   3,309   35.6%
Investment income  (25)  (91)  -72.5%
Loss on extinguishment of debt  5,706   -  NM 
Net periodic income, excluding service cost  -   (87)  -100.0%
Income before income taxes  14,182   5,906   140.1%
Income tax expense  2,654   1,407   88.6%
Consolidated net income  11,528   4,499   156.2%
Net loss attributable to non-controlling interest  (255)  -     
Net income attributable to Turning Point Brands, Inc. $11,783  $4,499     
  Three Months Ended September 30, 
  2021  2020  % Change 
Consolidated Results of Operations Data:         
Net sales         
Zig-Zag products $42,234  
$
35,973
   17.4%
Stoker’s products  30,472   
29,764
   2.4%
NewGen products  37,198   
38,437
   -3.2%
Total net sales  109,904   104,174   5.5%
Cost of sales  55,635   55,867   -0.4%
Gross profit            
Zig-Zag products  23,703   21,263   11.5%
Stoker’s products  17,104   16,042   6.6%
NewGen products  13,462   11,002   22.4%
Total gross profit  54,269   48,307   12.3%
             
Selling, general, and administrative expenses  31,894   32,286   -1.2%
Operating income  22,375   16,021   39.7%
Interest expense, net  5,397   3,539   52.5%
Investment income  (157)  (3)  5133.3%
Gain on extinguishment of debt  (375)  -  NM 
Net periodic income, excluding service cost  -   1,188   -100.0%
Income before income taxes  17,510   11,297   55.0%
Income tax expense  4,073   2,277   78.9%
Consolidated net income  13,437   9,020   49.0%
Net loss attributable to non-controlling interest  (31)  -  NM 
Net income attributable to Turning Point Brands, Inc. $13,468  $9,020   49.3%

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Net Sales:  For the three months ended March 31,September 30, 2021, consolidated net sales increased to $107.6$109.9 million from $90.7$104.2 million for the three months ended March 31,September 30, 2020, an increase of $17.0$5.7 million or 18.7%5.5%. The increase in net sales was primarily driven by increased sales volume across all segments, primarily in the Zig-Zag Products segment.

For the three months ended March 31,September 30, 2021, net sales in the Zig-Zag Products segment increased to $41.0$42.2 million from $28.9$36.0 million for the three months ended March 31,September 30, 2020, an increase of $12.1$6.3 million or 41.8%17.4%. For the three months ended March 31,September 30, 2021, volume increased 36.9%17.0% and price/mix increased 5.0%0.4%. The increase in net sales was primarily related toled by our Canadian business which benefited from the consolidation of ReCreation in the current year period. This growth was complemented by double-digit growth in USU.S. rolling papers MYO cigar wraps and Canadian papers.our E-Commerce business.

For the three months ended March 31,September 30, 2021, net sales in the Stoker’s Products segment increased to $29.3$30.5 million from $26.5$29.8 million for the three months ended March 31,September 30, 2020, an increase of $2.8$0.7 million or 10.4%2.4%. For the three months ended March 31,September 30, 2021, volume increased 5.1%decreased 4.1% and price/mix increased 5.3%6.5%. The increase in net sales was driven by the continuing double-digit volume growth of Stoker’s® MST and lowoffset by single-digit growth ofdecline in loose-leaf chewing tobacco.

For the three months ended March 31,September 30, 2021, net sales in the NewGen products segment increaseddecreased to $37.4$37.2 million from $35.3$38.4 million for the three months ended March 31,September 30, 2020, an increasea decrease of $2.1$1.2 million or 6.0%3.2%. The increasedecrease in net sales was primarily the result of growthdeclines in both the vape distribution businesses and Nu-X.as a result of strong B2C orders during stay-at-home provisions in the prior year.

Gross Profit:  For the three months ended March 31,September 30, 2021, consolidated gross profit increased to $53.3$54.3 million from $41.4$48.3 million for the three months ended March 31,September 30, 2020, an increase of $11.8$6.0 million or 28.6%12.3%. Gross profit as a percentage of revenue increased to 49.5%49.4% for the three months ended March 31,September 30, 2021, compared to 45.7%46.4% for the three months ended March 31,September 30, 2020 driven by increased margin in the Zig-ZagNewGen Products segment as a result of the Durfort transaction.and Stoker’s Products segments.

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For the three months ended March 31,September 30, 2021, gross profit in the Zig-Zag Products segment increased to $24.9$23.7 million from $16.1$21.3 million for the three months ended March 31,September 30, 2020, an increase of $8.8$2.4 million or 54.3%11.5%. Gross profit as a percentage of net sales decreased to 56.1% of net sales for the three months ended September 30, 2021, from 59.1% of net sales for the three months ended September 30, 2020, as a result of the consolidation of ReCreation in the current year period which operates at lower margins than our traditional business.

For the three months ended September 30, 2021, gross profit in the Stoker’s Products segment increased to $17.1 million from $16.0 million for the three months ended September 30, 2020, an increase of $1.1 million or 6.6%. Gross profit as a percentage of net sales increased to 60.7%56.1% of net sales for the three months ended March 31,September 30, 2021, from 55.8%53.9% of net sales for the three months ended March 31, 2020, as a result of increased MYO cigar wraps sales combined with margin increases as a result of the Durfort transaction.

For the three months ended March 31, 2021, gross profit in the Stoker’s Products segment increased to $15.9 million from $13.9 million for the three months ended March 31, 2020, an increase of $2.0 million or 14.5%. Gross profit as a percentage of net sales increased to 54.3% of net sales for the three months ended March 31, 2021, from 52.4% of net sales for the three months ended March 31,September 30, 2020, primarily as a result of strong incremental margin contribution of MST.

For the three months ended March 31,September 30, 2021, gross profit in the NewGen products segment increased to $12.5$13.5 million from $11.4$11.0 million for the three months ended March 31,September 30, 2020, an increase of $1.0$2.5 million or 9.2%22.4%. Gross profit as a percentage of net sales increased to 33.4%36.2% of net sales for the three months ended March 31,September 30, 2021, from 32.4%28.6% of net sales for the three months ended March 31, 2020.September 30, 2020, primarily as a result of increased margins in the vape distribution businesses.

Selling, General, and Administrative Expenses:  For the three months ended March 31,September 30, 2021, selling, general, and administrative expenses decreased to $28.9$31.9 million from $32.4$32.3 million for the three months ended March 31,September 30, 2020, a decrease of $3.5$0.4 million or 10.7%1.2%. Selling, general and administrative expenses in the three months ended March 31,September 30, 2021 included $1.5$1.8 million of stock options, restricted stock and incentives expense, and $0.6$0.2 million of transaction expenses.income and $1.0 million of expense related to PMTA. Selling, general and administrative expenses in the three months ended March 31,September 30, 2020 included $0.5$0.8 million of stock option, restricted stock and incentives expense, $1.0$0.6 million of transaction costs and $5.9$5.3 million of expense related to PMTA, which was the primary driver for the decreasePMTA. The increase in year-over-year selling, general, and administrative expenses.expenses is the result of variable costs in our online businesses as well as increased shipping costs from PACT Act implementation for vape products and higher freight rates across all segments combined with the impact of the consolidation of ReCreation in the current year period.

Interest Expense, net:  For the three months ended March 31,September 30, 2021, interest expense, net increased to $4.5$5.4 million, from $3.3$3.5 million for the three months ended March 31,September 30, 2020 as a result of the completion of the offering of the Senior Secured Notes and related refinancing of the 2018 First Lien Credit Facility which increased the Company’s outstanding debt.

Investment Income:  For the three months ended March 31,September 30, 2021, investment income decreasedincreased to $0.0$0.2 million, from $0.1$0.0 million for the three months ended March 31,September 30, 2020.

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LossGain on Extinguishment of Debt: There was $5.7 million lossGain on extinguishment of debt was $0.4 million for the three months ended March 31,September 30, 2021 related to the entire repayment of the 2018 First Lien Credit Facility,$10 million Promissory Note from the acquisition of certain Durfort assets for a total payment of $9.6 million, compared to $0.0 million for the three months ended March 31,September 30, 2020.

Net Periodic Income: Net periodic income was $0.0 million for the three months ended March 31,September 30, 2021 compared to $0.1$1.2 million for the three months ended March 31,September 30, 2020.

Income Tax Expense:  Our income tax expense of $2.7$4.1 million was 18.7%23.3% of income before income taxes for the three months ended March 31,September 30, 2021 and included a discrete tax benefit of $3.3$1.0 million relating to stock option exercises. Our effective income tax rate was 23.8%20.2% for the three months ended March 31,September 30, 2020 and included a discrete tax deduction $0.7benefit $0.6 million relating to stock option exercises.from the shutdown of the pension plan.

Net Loss Attributable to Non-Controlling Interest:  Net loss attributable to non-controlling interest was $0.3$0.0 million for the three months ended March 31,September 30, 2021 compared to $0.0 million for the three months ended March 31,September 30, 2020.

Consolidated Net Income:Income Attributable to Turning Point Brands, Inc.:  Due to the factors described above, consolidated net income attributable to Turning Point Brands, Inc. for the three months ended March 31,September 30, 2021 and 2020, was $11.8$13.5 million and $4.5$9.0 million, respectively.

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Comparison of the Nine Months Ended September 30, 2021, to the Nine Months Ended September 30, 2020

The table and discussion set forth below displays our consolidated results of operations (in thousands):

  Nine Months Ended September 30, 
  2021  2020  % Change 
Consolidated Results of Operations Data:         
Net sales         
Zig-Zag products $130,440  
$
92,290
   41.3%
Stoker’s products  93,096   
87,081
   6.9%
NewGen products  116,652   
120,455
   -3.2%
Total net sales  340,188   299,826   13.5%
Cost of sales  172,685   162,152   6.5%
Gross profit            
Zig-Zag products  76,342   53,066   43.9%
Stoker’s products  51,142   46,424   10.2%
NewGen products  40,019   38,184   4.8%
Total gross profit  167,503   137,674   21.7%
             
Selling, general, and administrative expenses  95,900   95,436   0.5%
Operating income  71,603   42,238   69.5%
Interest expense, net  15,406   10,143   51.9%
Investment income  (292)  (128)  128.1%
Loss on extinguishment of debt  5,331   -  NM 
Net periodic income, excluding service cost  -   997   -100.0%
Income before income taxes  51,158   31,226   63.8%
Income tax expense  11,151   7,412   50.4%
Consolidated net income  40,007   23,814   68.0%
Net loss attributable to non-controlling interest  (598)  -  NM 
Net income attributable to Turning Point Brands, Inc. $40,605  $23,814   70.5%

Net Sales:  For the nine months ended September 30, 2021, consolidated net sales increased to $340.2 million from $299.8 million for the nine months ended September 30, 2020, an increase of $40.4 million or 13.5%. The increase in net sales was primarily driven by increased sales volume in the Zig-Zag Products segment.

For the nine months ended September 30, 2021, net sales in the Zig-Zag Products segment increased to $130.4 million from $92.3 million for the nine months ended September 30, 2020, an increase of $38.2 million or 41.3%. For the nine months ended September 30, 2021, volume increased 37.3% and price/mix increased 4.0%. The increase in net sales was led by double-digit growth in sales of our MYO cigar wraps business, which experienced COVID-related manufacturing disruption in the prior year period. This growth was complemented by our Canadian business which benefited from the consolidation of ReCreation in the current year period  and double-digit growth in U.S. rolling papers.

For the nine months ended September 30, 2021, net sales in the Stoker’s Products segment increased to $93.1 million from $87.1 million for the nine months ended September 30, 2020, an increase of $6.0 million or 6.9%. For the nine months ended September 30, 2021, volume increased 1.0% and price/mix increased 5.9%. The increase in net sales was driven by the continuing double-digit growth of Stoker’s® MST offset by low single-digit decline in loose-leaf chewing tobacco.

For the nine months ended September 30, 2021, net sales in the NewGen products segment decreased to $116.7 million from $120.5 million for the nine months ended September 30, 2020, a decrease of $3.8 million or 3.2%. The decrease in net sales was primarily the result of declines in the vape distribution businesses as a result of strong B2C orders during stay-at-home provisions in the prior year.

Gross Profit:  For the nine months ended September 30, 2021, consolidated gross profit increased to $167.5 million from $137.7 million for the nine months ended September 30, 2020, an increase of $29.8 million or 21.7%. Gross profit as a percentage of revenue increased to 49.2% for the nine months ended September 30, 2021, compared to 45.9% for the nine months ended September 30, 2020 driven by increased margin in the Zig-Zag Products segment as a result of the Durfort transaction in June 2020.

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For the nine months ended September 30, 2021, gross profit in the Zig-Zag Products segment increased to $76.3 million from $53.1 million for the nine months ended September 30, 2020, an increase of $23.3 million or 43.9%. Gross profit as a percentage of net sales increased to 58.5% of net sales for the nine months ended September 30, 2021, from 57.5% of net sales for the nine months ended September 30, 2020, as a result of increased MYO cigar wraps sales combined with margin increases as a result of the Durfort transaction in September 2020.

For the nine months ended September 30, 2021, gross profit in the Stoker’s Products segment increased to $51.1 million from $46.4 million for the nine months ended September 30, 2020, an increase of $4.7 million or 10.2%. Gross profit as a percentage of net sales increased to 54.9% of net sales for the nine months ended September 30, 2021, from 53.3% of net sales for the nine months ended September 30, 2020, primarily as a result of strong incremental margin contribution of MST.

For the nine months ended September 30, 2021, gross profit in the NewGen products segment increased to $40.0 million from $38.2 million for the nine months ended September 30, 2020, an increase of $1.8 million or 4.8%. Gross profit as a percentage of net sales increased to 34.3% of net sales for the nine months ended September 30, 2021, from 31.7% of net sales for the nine months ended September 30, 2020, primarily as a result of increased margins in the vape distribution businesses.

Selling, General, and Administrative Expenses:  For the nine months ended September 30, 2021, selling, general, and administrative expenses increased to $95.9 million from $95.4 million for the nine months ended September 30, 2020, an increase of $0.5 million or 0.5%. Selling, general and administrative expenses in the nine months ended September 30, 2021 included $6.0 million of stock options, restricted stock and incentives expense (including $1.1 million for accelerated vesting of options for a departing executive), $1.1 million of transaction expenses and $1.9 million of expenses related to PMTA. Selling, general and administrative expenses in the nine months ended September 30, 2020 included $2.0 million of stock option, restricted stock and incentives expense, $1.9 million of transaction costs and $14.4 million of expense related to PMTA. The increase in selling, general, and administrative expenses is the result of variable costs in our online businesses as well as increased shipping costs from PACT Act implementation for vape products and higher freight rates across all segments combined with the impact of the consolidation of ReCreation in the current year period.

Interest Expense, net:  For the nine months ended September 30, 2021, interest expense, net increased to $15.4 million, from $10.1 million for the nine months ended September 30, 2020 as a result of the completion of the offering of the Senior Secured Notes and related refinancing of the 2018 First Lien Credit Facility which increased the Company’s outstanding debt.

Investment Income:  For the nine months ended September 30, 2021, investment income increased to $0.3 million, from $0.1 million for the nine months ended September 30, 2020.

Loss on Extinguishment of Debt: Loss on extinguishment of debt was $5.3 million for the nine months ended September 30, 2021 related primarily to the repayment of the 2018 First Lien Credit Facility, compared to $0.0 million for the nine months ended September 30, 2020.

Net Periodic Income: Net periodic income was $0.0 million for the nine months ended September 30, 2021 compared to $1.0 million for the nine months ended September 30, 2020.

Income Tax Expense:  Our income tax expense of $11.2 million was 21.8% of income before income taxes for the nine months ended September 30, 2021 and included a discrete tax benefit of $6.2 million relating to stock option exercises. Our effective income tax rate was 23.7% for the nine months ended September 30, 2020 and included a discrete tax deduction $0.9 million relating to stock option exercises and a discrete tax benefit of $0.6 million from the shutdown of the pension plan.

Net Loss Attributable to Non-Controlling Interest:  Net loss attributable to non-controlling interest was $0.6 million for the nine months ended September 30, 2021 compared to $0.0 million for the nine months ended September 30, 2020.

Net Income Attributable to Turning Point Brands, Inc.:  Due to the factors described above, net income attributable to Turning Point Brands, Inc. for the nine months ended September 30, 2021 and 2020, was $40.6 million and $23.8 million, respectively.

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EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance. In addition, our Revolving Credit Agreement contains financial covenants which use Adjusted EBITDA calculations, and many of the carve-outs from the negative covenants in the Senior Secured Notes Indenture and Revolving Credit Facility are based off of EBITDA, Adjusted EBITDA and related metrics.

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

Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The tables below provide reconciliations between net income and Adjusted EBITDA.

(in thousands) 
Three Months Ended
September 30,
 
  2021  2020 
Net income attributable to Turning Point Brands, Inc. $13,468  $9,020 
Add:        
Interest expense, net  5,397   3,539 
Gain on extinguishment of debt  (375)  - 
Income tax expense  4,073   2,277 
Depreciation expense  767   809 
Amortization expense  477   477 
EBITDA $23,807  $16,122 
Components of Adjusted EBITDA        
Other (a)  -   1,188 
Stock options, restricted stock, and incentives expense (b)  1,752   772 
Transactional expenses (c)  (232)  570 
FDA PMTA (d)  960   5,271 
Adjusted EBITDA $26,287  $23,923 

  Three Months Ended 
(in thousands) March 31, 
  2021  2020 
Net income attributable to Turning Point Brands, Inc. $11,783  $4,499 
Add:        
Interest expense, net  4,486   3,309 
Loss on extinguishment of debt  5,706   - 
Income tax expense  2,654   1,407 
Depreciation expense  788   851 
Amortization expense  477   425 
EBITDA $25,894  $10,491 
Components of Adjusted EBITDA        
Other (a)  -   (87)
Stock options, restricted stock, and incentives expense (b)  1,498   455 
Transactional expenses (c)  607   1,049 
FDA PMTA (d)  -   5,874 
Adjusted EBITDA $27,999  $17,782 
(a)
Represents non-cash pension expense (income) and foreign exchange hedging.
(b)Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units.
(c)Represents the fees incurred for transaction expenses.
(d)Represents costs associated with applications related to FDA premarket tobacco product application (“PMTA”).

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(in thousands) 
Nine Months Ended
September 30,
 
  2021  2020 
Net income attributable to Turning Point Brands, Inc. $40,605  $23,814 
Add:        
Interest expense, net  15,406   10,143 
Loss on extinguishment of debt  5,331   - 
Income tax expense  11,151   7,412 
Depreciation expense  2,313   2,482 
Amortization expense  1,431   1,304 
EBITDA $76,237  $45,155 
Components of Adjusted EBITDA        
Other (a)  -   841 
Stock options, restricted stock, and incentives expense (b)  6,015   1,987 
Transactional expenses (c)  1,077   1,909 
FDA PMTA (d)  960   14,435 
Adjusted EBITDA $84,289  $64,327 

(a)Represents non-cash pension expense (income) and foreign exchange hedging.
(b)Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units.
(c)Represents the fees incurred for transaction expenses.
(d)Represents costs associated with applications related to FDA premarket tobacco product application (“PMTA”).

Liquidity and Capital Reserves

Our principal uses for cash are working capital, debt service, and capital expenditures. We believe our cash on hand, cash flows from operations and borrowing availability under our 2021 Revolving Credit Facility are adequate to satisfy our operating cash requirements for the foreseeable future. As of March 31,September 30, 2021, we had $167.4$130.6 million of cash on hand and have $21.4 million of availability under the 2021 Revolving Credit Facility.

Our working capital, which we define as current assets less cash and current liabilities, increased $3.6$15.2 million to $68.6$80.2 million at March 31,September 30, 2021, compared with $65.0 million at December 31, 2020. The increase was primarily due to the decreaseincrease in the current portioninventories as a result of long-term debt.increased sales.

 As of  As of 
(in thousands) March 31,  December 31,  
September 30,
2021
 
December 31,
2020
 
 2021  2020 
           
Current assets $129,823  $121,638  $134,225 $121,638 
Current liabilities  61,216   56,629   54,056  56,629 
Working capital $68,607  $65,009  $80,169 $65,009 

Cash Flows from Operating Activities

For the threenine months ended March 31,September 30, 2021, net cash provided by operating activities was $24.2$49.6 million compared to net cash provided by operating activities of $14.7$33.2 million for the threenine months ended March 31,September 30, 2020, an increase of $9.5$16.4 million, primarily due to higher net income resulting from increased sales.

Cash Flows from Investing Activities

For the threenine months ended March 31,September 30, 2021, net cash used in investing activities was $15.8$52.2 million compared to net cash used in investing activities of $0.9$41.2 million for the threenine months ended March 31,September 30, 2020, an increase of $14.9$11.1 million, primarily due to the purchase of investments in our MSA escrow account which reflects the change in restricted cash.

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Cash Flows from Financing Activities

For the threenine months ended March 31,September 30, 2021, net cash provided by financing activities was $102.1$76.3 million compared to net cash used in financing activities of $9.7$16.9 million for the threenine months ended March 31,September 30, 2020, an increase in cash flow of $111.8$93.2 million, primarily due to the net proceeds from the Senior Secured Notes partially offset by the repayment in full of the 2018 First Lien Term Loan in the first quarter of 2021 and the repurchase of common stock during 2021.

Dividends and Share Repurchase

The most recent dividend of $0.055 per common share was paid on April 9,October 8, 2021, to shareholders of record at the close of business on March 19,September 17, 2021.

On February 25, 2020, our Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The program is subject to the ongoing discretion of the Board. The total number of shares repurchased for the three months ended March 31,September 30, 2021, was 119,031125,000 shares for a total cost of $5.7$6.4 million and an average price per share of $48.16. $34.1$51.16. $19.3 million remains available for share repurchases under the program at March 31,September 30, 2021.

Long-Term Debt

As of March 31,September 30, 2021, we were in compliance with the financial and restrictive covenants of the Senior Secured Notes and 2021 Revolving Credit Facility. The following table provides outstanding balances of our debt instruments.


 March 31,  December 31, 
 2021  2020 
       
September 30,
2021
 
December 31,
2020
 
Senior Secured Notes $250,000  $-  $250,000 $- 
2018 First Lien Term Loan  -   130,000  - 130,000 
Convertible Senior Notes  172,500   172,500  172,500 172,500 
Note payable - Promissory Note  10,000   10,000  - 10,000 
Note payable - Unsecured Loan  7,485   7,485   7,485  7,485 
Gross notes payable and long-term debt  439,985   319,985  429,985 319,985 
Less deferred finance charges  (10,183)  (5,873) (8,947) (5,873)
Less current maturities  (5,000)  (12,000)  (7,485)  (12,000)
Notes payable and long-term debt $424,802  $302,112  $413,553 $302,112 

Senior Secured Notes

On February 11, 2021, we closed a private offering (the “Offering”) of $250 million aggregate principal amount of our 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.We used the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

Obligations under the Senior Secured Notes are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (the “Guarantors”) that guarantee any Credit Facility (as defined in the Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”) or capital markets debt securities of the Company or Guarantors in excess of $15.0 million. The Senior Secured Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.

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We may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium. Thereafter, we may redeem the Senior Secured Notes, in whole or in part, at established redemption prices set forth in the Senior Secured Notes Indenture, plus accrued and unpaid interest, if any. In addition, on or prior to February 15, 2023, we may redeem up to 40% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625%, plus accrued and unpaid interest, if any to the redemption date; provided, however, that at least 50% of the original aggregate principal amount of the Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remains outstanding. In addition, at any time and from time to time prior to February 15, 2023, but not more than once in any twelve-month period, we may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes at a redemption price of 103% of the aggregate principal amount of Senior Secured Notes redeemed plus accrued and unpaid interest, if any to but not including the redemption date, on the Senior Secured Notes to be redeemed.

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

The Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Indenture.

We incurred debt issuance costs attributable to the issuance of the Senior Secured Notes of $6.4 million which are amortized to interest expense using the effective interest method over the expected life of the Senior Secured Notes.

The Indenture provides for customary events of default.default.

2021 Revolving Credit Facility

In connection with the Offering, we also entered into a new $25 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The 2021 Revolving Credit Facility provides for a revolving line of credit of up to $25.0 million. Letters of credit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). We have not drawn any borrowings under the 2021 Revolving Credit Facility but do have letters of credit of approximately $3.6 million outstanding under the facility. The 2021 Revolving Credit Facility will mature on August 11, 2025 if none of our Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.

Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging). We also have the option to borrow at a rate determined by reference to the base rate.

The obligations under the 2021 Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021 Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.

The 2021 Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021 Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the 2021 Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5,000,000) in the aggregate outstanding exceeds 35% of the total commitments under the 2021 Revolving Credit Facility.

We incurred debt issuance costs attributable to the issuance of the 2021 Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method over the expected life of the 2021 Revolving Credit Facility.

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50
The 2021 Revolving Credit Agreement provides for customary events of default.

2018 Credit Facility

In the first quarter of 2021, we used a portion of the proceeds from the issuance of the Senior Secured Notes to prepay all outstanding amounts under and terminate the 2018 First Lien Credit Facility in the amount of $130.0 million, and the transaction resulted in a $5.7 million loss on extinguishment of debt. See Note 11, “Notes Payable and Long-Term Debt,” in the Notes to Consolidated Financial Statements included in this Quarterly Report for further discussion.

Convertible Senior Notes

In July 2019 we closed an offering of $172.5 million in aggregate principal amount of our 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations.

The Convertible Senior Notes are convertible into approximately 3,205,8953,207,293 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.58518.593 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.81$53.78 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. The conversion price is adjusted periodically as a result of dividends paid by the us in excess of pre-determined thresholds of $0.04 per share. Upon conversion, we may pay cash, shares of our common stock or a combination of cash and stock, as determined by us at our discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of March 31,September 30, 2021.

We early adopted ASU 2020-06 effective January 1, 2021 on a retrospective basis to all periods presented. Under ASU 2020-06, the Company will account for the Convertible Senior Notes entirely as a liability and will no longer separately account for the Convertible Senior Notes with liability and equity components. See Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in this Quarterly Report for further discussion of the impact of the adoption of ASU 2020-06.

We incurred debt issuance costs attributable to the Convertible Senior Notes of $5.9 million which are amortized to the interest expense using the effective interest method over the expected life of the Convertible Senior Notes.

In connection with the Convertible Senior Notes offering, we entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.81$53.78 per and a cap price of $82.86 per share, and are exercisable when, and if, the Convertible Senior Notes are converted. We paid $20.53 million for these capped calls at the time they were entered into and charged that amount to additional paid-in capital.

The indenture covering the Convertible Senior Notes contains customary events of default.

Promissory Note

On June 10, 2020, in connection with the acquisition of certain Durfort assets, we issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of $10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first interest payment due September 10, 2020. The Principal Amount iswas payable in two $5.0 million installments, with the first installment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment iswas subject to reduction for certain amounts payable to us as a holdback. We prepaid all outstanding amounts under and terminated the Promissory Note in the third quarter of 2021 in the amount of $9.6 million. The transaction resulted in a $0.4 million gain on extinguishment of debt.

Unsecured Loan

On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020, National Tobacco Company, L.P., a wholly-owned subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan. The proceeds of the loan were received on April 27, 2020. The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate. During 2021, we applied for forgiveness for the loan. On October 15, 2021, we received notice that our application for forgiveness was fully approved. We anticipate that the extinguishment of the unsecured loan will occur in the fourth quarter of 2021.

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Off-balance Sheet Arrangements

During the threenine months ended March 31,September 30, 2021, the Company did not execute any forward contracts. At March 31,September 30, 2021, the Company had forward contracts for the purchase of €13.1€3.3 million and sale of €14.3 million.€3.6 million outstanding. The fair value of the foreign currency contracts werewas based on quoted market prices and resulted in an asset of $0.1$0.0 million included in Other current assets and liability of $0.0 million included in Accrued liabilities at March 31,September 30, 2021. During 2020, the Company executed various forward contracts for the purchase of €19.7 million and sale of €21.4 million with maturity dates ranging from December 2020 to November 2021. At December 31, 2020, the Company had forward contracts for the purchase of €18.0 million and sale of €19.6 million.million outstanding. The fair value of the foreign currency contracts areis based on quoted market prices and resulted in an asset of $0.4 million included in Other current assets and liability of $0.0 million included in Accrued liabilities at December 31, 2020. The Company had interest rate swap contracts for a notional amount of $70 million at December 31, 2020. The fair values of the interest rate swap contracts are based upon quoted market prices and resulted in a liability of $3.7 million as of December 31, 2020, included in other long-term liabilities. The Company terminated the interest rate swap agreement in conjunction with the prepayment of all outstanding amounts under to the 2018 First Lien Credit Facility in the first quarter of 2021 in the amount of $3.6 million, and the transaction resulted in a $5.7 million loss recorded in the loss on extinguishment of debt. See Note 11, “Notes Payable and Long-Term Debt,” in the Notes to Consolidated Financial Statements included in this Quarterly Report for further discussion.

Inflation

WeWhile the rate of inflation has increased recently, we believe that any effect of inflation at current levels will be minimal. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and believe that we will continue to be able to do so for the foreseeable future. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to our successful procurement with regard to our tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers. However, if the rate of inflation were to increase materially, it could have an adverse effect on our results of operations.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Sensitivity

There have been no material changes in our exposure to exchange rate fluctuation risk, as reported within our 2020 Annual Report on Form 10-K, during the period. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2020 Annual Report on Form 10-K filed with the SEC.

Credit Risk

There have been no material changes in our exposure to credit risk, as reported within our 2020 Annual Report on Form 10-K, during the threenine months ended March 31,September 30, 2021. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2020 Annual Report on Form 10-K filed with the SEC.

Interest Rate Sensitivity

In February 2021, we issued the Senior Secured Notes in an aggregate principal amount of $250 million. In July 2019, we issued Convertible Senior Notes in an aggregate principal amount of $172.5 million. We carry the Senior Secured Notes and Convertible Senior Notes at face value. Since the Senior Secured Notes and Convertible Senior Notes bear interest at a fixed rate, we have no financial statement risk associated with changes in interest rates. However, the fair value of the Convertible Senior Notes changes when the market price of our stock fluctuates, or interest rates change. Our remaining debt instruments bear interest at fixed rates and are not subject to interest rate volatility.

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Item 4. Controls and Procedures

We have carried out an evaluation under the supervision, and with the participation of, our management including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and Chief Accounting Officer (“CAO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of March 31,September 30, 2021. Based upon the evaluation, our CEO, CFO, and CAO concluded our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Act is: (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31,September 30, 2021 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal proceedings, please see Contingencies in Note 16 to the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

See ‘Risk Factors—We may become subject to significant product liability litigation’ within our 2020 Annual Report on Form 10-K for additional details.

Item 1A. Risk Factors

In addition to the other information set forth in this report, carefully consider the factors discussed in the ‘Risk Factors’ section contained in our 2020 Annual Report on Form 10-K. There have been no material changes to the Risk Factors set forth in the 2020 Annual Report on Form 10-K.10-K with the exception of the below.

Many of our NewGen and cigar products have not obtained premarket authorization from the FDA and are currently marketed pursuant to a policy of FDA enforcement discretion, which could change. There could be a material adverse impact on our NewGen business development efforts if the FDA determines that our products are not subject to this compliance policy, or if our products become subject to increased regulatory compliance burdens imposed by the FDA and other regulatory or legislative bodies.

Since their introduction, there has been significant uncertainty regarding whether, how and when tobacco regulations would apply to NewGen products, such as electronic cigarettes or other vaporizer products. Based on a decision in December 2010 by the U.S. Court of Appeals for the D.C. Circuit (the “Sottera decision”), the FDA is permitted to regulate electronic cigarettes containing tobacco-derived nicotine as “tobacco products” under the Tobacco Control Act.

Effective August 8, 2016, FDA’s regulatory authority under the Tobacco Control Act was extended to all remaining tobacco products, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; or (v) any other tobacco product “newly deemed” by FDA.  These deeming regulations apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters).

The deeming regulations require us to (i) register with the FDA and report product and ingredient listings; (ii) market newly deemed products only after FDA review and approval; (iii) only make direct and implied claims of reduced risk if the FDA approves after finding that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; (iv) refrain from distributing free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18; (vi) develop an approved warning plan and include prescribed health warnings on packaging and advertisements; and (vii) refrain from selling the products in vending machines, unless the machine is located in a facility that never admits youth. Newly deemed tobacco products are also subject to the other requirements of the Tobacco Control Act, such as that they not be adulterated or misbranded. The FDA could in the future promulgate good manufacturing practice regulations for these and our other products, which could have a material adverse impact on our ability and the cost to manufacture our products.

Marketing authorizations will be necessary in order for us to continue our distribution of NewGen and cigar products. The FDA has announced various compliance policies whereby it does not intend to prioritize enforcement for lack of premarket authorization against newly-deemed products, provided that such tobacco products were marketed as of August 8, 2016; are not marketed in certain manners likely to be attractive to youth; and for which premarket applications were timely submitted. As a result of recent litigation and subsequent FDA Guidance, marketing applications for newly-deemed products were required to have been submitted no later than September 9, 2020, with the exception of our “grandfathered” products (products in commerce as of February 15, 2007) which are already authorized. Under the FDA’s compliance policy, such products could remain on the market until September 9, 2021, unless the FDA makes an adverse determination prior to that date. Subsequent to September 9, 2021, FDA indicated its enforcement priority is those applicants who have received negative action on their application, such as a Marketing Denial Order or Refuse to File notification and who continue to illegally sell those unauthorized products, as well as products for which manufacturers failed to submit a marketing application.

In September 2020, we submitted applications on a timely basis for the appropriate authorizations for our products that are deemed products not otherwise grandfathered. We believe that these products satisfy the criteria for current marketing pursuant to the FDA’s compliance policy. However, there can be no guarantee that the FDA will agree, and the FDA may bring an enforcement action against our products for lack of premarket authorization and/or deny our premarket applications.     We have no assurances that the outcome of such application review processes will result in our products receiving marketing authorizations from the FDA. For instance, on September 14, 2021, the FDA issued an MDO for certain of the Company’s  proprietary e-liquid products subject of these PMTAs. The Company filed a Petition for Review in the Sixth Circuit Court of Appeals on September 23, 2021, followed by an Emergency Motion for a Stay Pending Review on September 30, 2021. On October 7, 2021, we were informed that the FDA had rescinded its September 14 MDO. We therefore withdrew both the Petition and Emergency Stay on October 8, 2021. The Rescission Letter indicated that FDA had found additional relevant information that was not adequately assessed. If the FDA were to issue additional MDOs that remained effective it could have an adverse effect on our business.

We also have certain previously regulated tobacco products which FDA removed from review but remain subject to “provisional” substantial equivalence submissions made on March 22, 2011; however, FDA has the discretion to reinitiate review of these products. If the FDA establishes regulatory processes that we are unable or unwilling to comply with, our business, results of operations, financial condition and prospects could be adversely affected.

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The anticipated costs of complying with future FDA regulations will be dependent on the rules issued by the FDA, the timing and clarity of any new rules or guidance documents accompanying these rules, the reliability and simplicity (or complexity) of the electronic systems utilized by FDA for information and reports to be submitted, and the details required by FDA for such information and reports with respect to each regulated product. Failure to comply with existing or new FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on our business, results of operations, financial condition and ability to market and sell our products.  Compliance and related costs could be substantial and could significantly increase the costs of operating in our NewGen and cigar product markets.

In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in litigation, criminal convictions or significant financial penalties and could impair our ability to market and sell certain of our NewGen and cigar products. At present, we are not able to predict whether the Tobacco Control Act will impact our products to a greater degree than competitors in the industry, thus affecting our competitive position.

Furthermore, in addition to the FDA, there are restrictions being proposed or in effect at the federal, state, and local level related to these products. For example, the PACT Act has now been amended to apply to certain NewGen products, which has impacts at the federal and state levels. These requirements are in addition to any increased regulation of internet sales that may be in effect or passed legislatively at the federal, state, or local levels, or promulgated via rulemaking by a government agency. Additionally, state attorneys general have monitored, and in some cases, have issued investigative requests to companies that sell these products related to online sales, marketing practices, and other aspects of the NewGen business. Increased regulation of additives in tobacco products through federal, state, or local governments may also adversely affect NewGen and cigar products. The application of these types of restrictions, and of any new laws or regulations which may be adopted in the future, to these products could result in additional expenses and require us to change our advertising and labeling, and methods of marketing and distribution of our products, any of which could have a material adverse effect on our business, results of operations and financial condition.

Some of our products are subject to developing and unpredictable regulation.

Some of our NewGen products marketed through our Nu-X subsidiary and similar third-party products sold through our NewGen distribution vehicles may be subject to uncertain and evolving federal, state and local regulations concerning hemp, CBD and other non-tobacco consumable products.  Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate.  We anticipate that all levels of government, which have not already done so, are likely to seek in some way to regulate these products, but the type, timing, and impact of such regulations remains uncertain.  These regulations include or could include restrictions including prohibitions on certain form factors, such as smokable hemp products, or age restrictions. Accordingly, we cannot give any assurance that such actions would not have a material adverse effect on this emerging business.

For instance, on October 21, 2021, the USPS published a Final Rule entitled “Treatment of E-Cigarettes in the Mail,” which followed its earlier publication of the Proposed Rule on February 19, 2021. This Final Rule was required as a result of the inclusion of POSECA in the Further Consolidated Appropriations Act, 2021. POSECA, among other things, expanded the definition of “cigarettes” in the Jenkins Act and PACT Act to expressly capture ENDS. Consistent with the Proposed Rule, the Final Rule extends the existing prohibition on and exceptions to the mailing of “cigarettes” via USPS to include ENDS products, other than the Consumer Testing and Public Health exceptions. POSECA’s definition of ENDS also captures non-tobacco products, such as e-liquids that do not contain tobacco-derived nicotine.

The COVID-19 Pandemic and related economic repercussions may affect our business.

The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in businesses globally. While these events have not yet had a material adverse effect on our business and B2C platforms like ours have seen elevated sales levels from consumer shifts to online purchasing, we can offer no assurance that the COVID-19 pandemic will not have an adverse effect in the future, particularly if the pandemic worsens or endures for an extended period of time.

At the onset of the pandemic we implemented several changes to enhance safety and mitigate health risk in our work environment. For our warehouse and manufacturing operations, these included split shifts, temperature scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization. These changes resulted in higher operational costs, and as a result, we instituted cost savings programs to offset these increased costs. We also put a hold on new spending commitments as we cautiously manage through this environment.

The COVID-19 pandemic may adversely impact our results. Our third-party cigar wrap manufacturer in the Dominican Republic was initially temporarily shut down, but after the initial temporary shutdown, has been operating without interruption related to COVID-19. Our supply chain has remained operational otherwise, but we can offer no assurance that it will not be adversely affected in the future, particularly as the COVID-19 pandemic continues to worsen.  Similarly, because we have more than 100 employees, we are subject to proposed federal testing requirements, which could affect our workforce and ultimately our results of operations if we have a significant number of employees unwilling to comply with such mandates.

If the impact of the COVID-19 pandemic continues for an extended period of time or worsens, it could have a material adverse effect on our supply chain or workforce, either of which could have a material adverse effect on our business, financial condition and liquidity. In addition, if the impact of the COVID-19 pandemic continues it may heighten the other risks that could affect our business.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. This share repurchase program has no expiration date and is subject to the ongoing discretion of the Board. All repurchases to date under our stock repurchase programs have been made through open market transactions, but in the future, we may also purchase shares through privately negotiated transactions or 10b5-1 repurchase plans. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million.

The following table includes information regarding purchases of our common stock made by us during the quarter ended March 31,September 30, 2021 in connection with the repurchase program described above:

           Maximum Number 
           (or Approximate 
        Total Number of  Dollar Value) 
        Shares Purchased  of Shares that 
  Total Number  Average  as Part of Publicly  May Yet Be 
  of Shares  Price Paid  Announced Plans  Purchased Under the 
Period 
Purchased (1)
  per Share  or Programs  Plans or Programs 
January 1 to January 31  40,498  $44.14   40,498   38,020,412 
February 1 to February 28  8,533  $55.98   8,533   37,542,735 
March 1 to March 31  100,258  $49.21   70,000   34,075,635 
Total  149,289       119,031     
Period 
Total Number
of Shares
Purchased
  
Average
Price Paid
per Share
  
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  
Maximum Number
(or Approximate
Dollar Value)
of Shares that
May Yet Be
Purchased Under the
Plans or Programs
 
July 1 to July 31  -  $-   -  $25,723,385 
August 1 to August 31  125,000  $51.16   125,000  $19,328,385 
September 1 to September 30  -  $-   -  $19,328,385 
Total  125,000       125,000     

(1) The total number of shares purchased includes (a) shares purchased under the February 2020 share repurchase program (which totaled 40,498 shares in January, 8,533 shares in February and 70,000 shares in March) and (b) shares withheld by the Company in an amount equal to the statutory withholding taxes for holders who vested in stock-based awards (which totaled 30,258 shares in March). Shares withheld by the Company to cover statutory withholdings taxes are repurchased pursuant to the applicable plan and not the authorization under the share repurchase program.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None
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Item 6. Exhibits

Exhibit No.
Description
4.1
Indenture, dated as of February 11, 2021, between Turning Point Brands, Inc., certain of its subsidiaries, as guarantors, and GLAS Trust Company LLC, as trustee (including the Form of Note as Exhibit A thereto). *
10.1Description
Credit Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., as obligor, Barclays Bank PLC, as administrative agent, and the lenders party thereto. *
10.2
First Lien Pari Passu Intercreditor Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., and the other grantors party thereto, Barclays Bank PLC, as first lien collateral agent, and GLAS Trust Company LLC, as other collateral agent. *
10.3
Pledge and Security Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., as grantor, the other grantors party thereto, Barclays Bank PLC, as collateral agent, and the lenders party thereto. *
10.4
Guaranty Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc. and certain of its subsidiaries, as guarantors, Barclays Bank PLC, as administrative agent, and the lenders party thereto. *
10.5
Pledge and Security Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., as grantor, the other grantors party thereto and GLAS Trust Company LLC, as collateral agent. *
  
18.1
Preferability letter from RMSRSM US, LLP regarding a change in accounting method. *(incorporated by reference to Exhibit 18.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021)
  
Rule 13a-14(a)/15d-14(a) Certification of Lawrence S. Wexler.*
  
Rule 13a-14(a)/15d-14(a) Certification of Luis Reformina.*
  
Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*
  
Section 1350 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
  
101XBRL (eXtensible Business Reporting Language). The following materials from Turning Point Brands, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020,2021, filed on October 27, 2020,26, 2021, formatted in Inline XBRL (iXBRL): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, and (v) the notes to consolidated financial statements.*
  
104Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101).*

*  Filed or furnished herewith

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 TURNING POINT BRANDS, INC.
    
  
By: /s/ Lawrence S. Wexler
 
  
Name: Lawrence S. Wexler
 
  
Title:  President and Chief Executive Officer
    
  
By: /s/ Luis Reformina
 
  
Name: Luis Reformina
 
  
Title:  Chief Financial Officer
    
  
By: /s/ Brian Wigginton
 
  
Name: Brian Wigginton
 
  
Title:  Chief Accounting Officer

Date: May 5,October 26, 2021


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