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, 20212022

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, 2021,19, 2022, there were 19,059,44918,136,353 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 1 
    
  5
    
  6
    
  7
    
  8
    
  9
    
  10
    
 ITEM 23431
    
 ITEM 34440
    
 ITEM 44541
    
PART II—OTHER INFORMATION 
  
 ITEM 14642
    
 ITEM 1A4642
    
 ITEM 24642
    
 ITEM 34642
    
 ITEM 44643
    
 ITEM 54643
    
 ITEM 64744
    
 4845

2

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;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;
uncertainty and continued evolution of the markets for our NewGen and cigar products;
complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;
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 escrow 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;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 applicableidentification a material weakness in our internal control related to emerging growth companies may make our common stock less attractive to investors, potentially decreasingineffective information technology general controls which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price;
Changes in the method for determining LIBOR or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt;

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 certificate 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 (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;
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;
exchange rate fluctuations;
adverse U.S. and global economic conditions;
departure of key management personnel or our inability to attract and retain talent;
infringement on or misappropriation of our intellectual property;
third-party claims that we infringe on their intellectual property; 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 Consolidated Balance Sheets
(dollars in thousands except share data)

ASSETS 
(unaudited)
March 31,
2022
  
December 31,
2021
 
Current assets:      
Cash $126,045  $128,320 
Accounts receivable, net of allowances of $177 in 2022 and $262 in 2021
  9,450   6,496 
Inventories  105,858   87,607 
Other current assets  25,663   26,746 
Total current assets  267,016   249,169 
Property, plant, and equipment, net  20,567   18,650 
Deferred income taxes  1,754   1,363 
Right of use assets  14,405   15,053 
Deferred financing costs, net  362   388 
Goodwill  162,323   162,333 
Other intangible assets, net  87,022   87,485��
Master Settlement Agreement (MSA) escrow deposits  30,237   31,720 
Other assets  35,017   35,399 
Total assets $618,703  $601,560 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $29,464  $7,361 
Accrued liabilities  29,921   32,937 
Other current liabilities  38   38 
Total current liabilities  59,423   40,336 
Notes payable and long-term debt  414,791   414,172 
Lease liabilities  12,625   13,336 
Total liabilities  486,839   467,844 
         
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; 19,785,806 issued shares and 18,180,174 outstanding shares at March 31, 2022, and 19,690,884 issued shares and 18,395,476 outstanding shares at December 31, 2021
  198   197 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
  0   0 
Additional paid-in capital  109,073   108,811 
Cost of repurchased common stock (1,605,632 shares at March 31, 2022, and 1,295,408 shares at December 31, 2021)
  (59,491)  (48,869)
Accumulated other comprehensive loss  (1,326)  (195)
Accumulated earnings  81,327   71,460 
Non-controlling interest  2,083   2,312 
Total stockholders’ equity  131,864   133,716 
Total liabilities and stockholders’ equity $618,703  $601,560 

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

5

Turning Point Brands, Inc.
Consolidated Statements of Income
(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 
 
Three Months Ended
March 31,
 
  2022  2021 
Net sales $100,894  $107,641 
Cost of sales  49,100   54,380 
Gross profit  51,794   53,261 
Selling, general, and administrative expenses  32,565   28,912 
Operating income  19,229   24,349 
Interest expense, net  5,196   4,486 
Investment income  (78)  (25)
Loss on extinguishment of debt  0   5,706 
Income before income taxes  14,111   14,182 
Income tax expense  3,340   2,654 
Consolidated net income  10,771   11,528 
Net loss attributable to non-controlling interest  (227)  (255)
Net income attributable to Turning Point Brands, Inc. $10,998  $11,783 
         
Basic income per common share:        
Net income attributable to Turning Point Brands, Inc. $0.60  $0.62 
Diluted income per common share:        
Net income attributable to Turning Point Brands, Inc. $0.55  $0.57 
Weighted average common shares outstanding:        
Basic  18,257,695   19,093,961 
Diluted  21,749,510   22,665,067 

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

5
6


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 

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


6


Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(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 
 
Three Months Ended
March 31,
 
  2022  2021 
Consolidated net income $10,771  $11,528 
         
Other comprehensive income (loss), net of tax        
Unrealized loss on MSA investments, net of tax of $357 in 2022 and $144 in 2021
  (1,126)  (452)
Foreign currency translation, net of tax of $0 in 2022 and 2021
  (7)  318 
Unrealized gain on derivative instruments, net of tax of $0 in 2022 and $937 in 2021
  0   2,448 
   (1,133)  2,314 
Consolidated comprehensive income  9,638   13,842 
Comprehensive loss attributable to non-controlling interest  (229)  (96)
Comprehensive income attributable to Turning Point Brands, Inc. $9,867  $13,938 

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

7

Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)


 
Three Months Ended
March 31,
 
  2022  2021 
Cash flows from operating activities:      
Consolidated net income $10,771  $11,528 
Adjustments to reconcile net income to net cash provided by operating activities:        
Loss on extinguishment of debt  0   5,706 
Loss (gain) on sale of property, plant, and equipment  1   (2)
Depreciation expense  871   788 
Amortization of other intangible assets  463   477 
Amortization of deferred financing costs  645   604 
Deferred income tax (benefit) expense  (34)  552 
Stock compensation expense  1,159   1,498 
Noncash lease (income) expense  (5)  6 
Gain on investments
  (14)  (13)
Changes in operating assets and liabilities:        
Accounts receivable  (2,958)  2,735 
Inventories  (18,258)  (12,461)
Other current assets  1,081   1,283 
Other assets  382   464 
Accounts payable  22,101   14,882 
Accrued liabilities and other  (3,165)  (3,806)
Net cash provided by operating activities $13,040  $24,241 
         
Cash flows from investing activities:        
Capital expenditures $(2,787) $(842)
Restricted cash, MSA escrow deposits  (8,468)  (14,920)
Proceeds on the sale of property, plant and equipment  1   2 
Net cash used in investing activities $(11,254) $(15,760)
         
Cash flows from financing activities:        
Proceeds from Senior Secured Notes $0  $250,000 
Payments of 2018 first lien term loan  0   (130,000)
Settlement of interest rate swaps  0   (3,573)
Payment of dividends  (1,022)  (958)
Payments of financing costs  0   (6,614)
Exercise of options  245   425 
Redemption of options  0   (1,466)
Redemption of performance restricted stock units  (1,141)  0 
Common stock repurchased  (10,622)  (5,733)
Net cash provided by (used in) financing activities $(12,540) $102,081 
         
Net (decrease) increase in cash
 $(10,754) $110,562 
Effect of foreign currency translation on cash $(3) $101 
         
Cash, beginning of period:        
Unrestricted  128,320   41,765 
Restricted  15,155   35,074 
Total cash at beginning of period  143,475   76,839 
         
Cash, end of period:        
Unrestricted  126,045   167,361 
Restricted  6,673   20,141 
Total cash at end of period $132,718  $187,502 
         
Supplemental schedule of noncash investing activities:        
Accrued capital expenditures $
187  $
177 
         
Supplemental schedule of noncash financing activities:        
Dividends declared not paid $1,131  $1,071 
Accrued expenses for incurred financing costs
 $0  $301 

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

8

Turning Point Brands, Inc.
Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity
For the Three Months Ended March 31, 2022 and 2021
(dollars in thousands)thousands except share data)
(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 
 
Voting
Shares
  
Common
Stock,
Voting
  
Additional
Paid-In
Capital
  
Cost of
Repurchased
Common Stock
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Accumulated
Earnings
  
Non-
Controlling
Interest
  Total 
                         
Beginning balance January 1, 2022
  18,395,476  $197  $108,811  $(48,869) $(195) $71,460  $2,312  $133,716 
                                 
Unrealized loss on MSA investments, net of tax of $357
  -   0   0   0   (1,126)  0   0   (1,126)
Foreign currency translation, net of tax of $0
  -   0   0   0   (5)  0   (2)  (7)
Stock compensation expense  -   0   1,159   0   0   0   0   1,159 
Exercise of options  25,166   0   245   0   0   0   0   245 
Performance restricted stock units issuance  103,843   1   (1)  0   0   0   0   0 
Performance restricted stock units redeemed  (34,087)  0   (1,141)  0   0   0   0   (1,141)
Cost of repurchased common stock  (310,224)  0   0   (10,622)  0   0   0   (10,622)
Dividends  -   0   0   0   0   (1,131)  0   (1,131)
Net income  -   0   0   0   0   10,998   (227)  10,771 
Ending balance March 31, 2022
  18,180,174  $198  $109,073  $(59,491) $(1,326) $81,327  $2,083  $131,864 
                                 
                                 
Beginning balance Janauary 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 

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

8
9


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

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

9


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

TurningTurning 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 sellproducts. The Company sells a wide range of products to adult consumers consisting of staple products with ourits iconic brands Zig-Zag® and Stoker’s® to ourand its next generation products to fulfill evolving consumer preferences. We operate in 3Its segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) NewGen Products. Our 3 focus segments are led by ourits core, proprietary brands – 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®)and Solace®in the NewGen Products segment. The Company’s products are available in more than 210,000215,000 retail outlets in North America. The Company operates in 3 segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) NewGen Products.

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, 2020.2021. 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, 2020.2021. 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.17. An additional disaggregation of contract revenue by sales channel can be found within Note 1817 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $5.9$5.7 million and $5.3$5.9 million for the three months ending March 31, 2022 and 2021, and 2020, respectivelyrespectively.
.

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 inventoryvalue 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 March 31,2021, 2022, the Company had on deposit approximately $32.1$32.1 million,, the fair value of which was approximately $31.5 million.$30.2 million. At December 31,2020, 2021, the Company had on deposit approximately $32.1$32.1 million,, the fair value of which was approximately $32.1 million. Effective$31.7 million. The Company discontinued its generic category of MYO in the2019 and its third quarter of 2017, the Company no longer sells any product covered under the MSA.Zig-Zagbranded MYO cigarette smoking tobacco in 2017. Thus, absentpending a change in MSA legislation, the Company has no remaining product lines covered by the MSA and will no longernot be required to make deposits to the MSAfuture escrow account.deposits.

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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 of the MSA escrow account as of March 31,2021 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 
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As of March 31, 2022
  As of December 31, 2021 
  Cost  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
  Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair
Value
 
Cash and cash equivalents $3,673  $0  $0  $3,673  $12,155  $0  $0  $12,155 
U.S. Governmental agency obligations
(unrealized position < 12 months)
  21,452   5   (1,145)  20,312   19,918
   4   (357)  19,565 
U.S. Governmental agency obligations
(unrealized position > 12 months)
  6,948   0   (696)  6,252   0   0   0   0 
  $32,073  $5  $(1,841) $30,237  $32,073  $
4  $
(357) $
31,720 

  As of 
   March 31,
2022
Less than one year $0 
One to five years  7,443 
Five to ten years  20,001 
Greater than ten years  956 
Total $28,400 

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
 
March 31,
2022
  
December 31,
2021
 
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   82 
         
Total $32,073  $32,073 
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Food and Drug Administration:Administration (FDA): 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)tobacco and wraps); (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 intendhave continued to supplement and complete thethese applications within FDA’s discretionary timeline.with additional information. 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 (collectively, the “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. 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.revenues generated by lower priority SKUs.

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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.order or otherwise remain in compliance with relevant legal requirements. 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 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 be 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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On March 15, 2022, the Consolidated Appropriations Act of 2022 was signed into law. This law included a new provision bringing non-tobacco nicotine products (“NTN Products”), including synthetic nicotine, under the jurisdiction of the FDA Center for Tobacco Products. This law took effect April 14, 2022, and subjects NTN Products to the same requirements as tobacco-derived products, including not selling these products to persons under 21 years of age, not marketing these products as modified risk tobacco products, and not distributing free samples of these products. Additionally, NTN Products on the market between March 15, 2022, and April 14, 2022, must file a PMTA by May 14, 2022. NTN Products subject of a timely-filed PMTA, and not in receipt of a negative action, may remain on the market until July 13, 2022. After July 13, 2022, these products are subject to enforcement.

We have been compiling premarket filings for certain of our NTN Products and will submit these filings ahead of the May 14, 2022, deadline. After the deadline passes, we will continue to supplement these filings with additional information; however, there can be no guarantee that FDA will accept such amendments or, similar to other filings, that the applications will meet the standard of “appropriate for the protection of public health.”  We also expect that for a period of time after the filing deadline, there may be a lack of enforcement, which may adversely impact our ability to compete in the marketplace against those who continue to sell unauthorized products.

Prevent All Cigarette Trafficking Act (“PACT Act”): On December 27, 2020, President Trump signed the Further Consolidated Appropriations Act, 2021, into law. This law included an amendment to the Jenkins Act expanding the definition of “cigarette” to include “electronic nicotine delivery systems,” or ENDS, and required that the United States Postal Service (USPS) promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS. USPS issued its final rule on October 21, 2021. We have received appropriate shipping exemptions from carrier services we use to carry the affected freight. Failure to comply with the PACT Act could result in significant financial or criminal penalties. To the extent we are unable to respond to, or comply with, these new requirements, we could lose our shipping exemptions, be subject to civil or criminal penalties, or there could be a material adverse effect on our business, results of operations and financial condition.

Note 3. Acquisitions

Unitabac

In July 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.
ReCreation Marketing
Direct Value Wholesale

In July 2019,April 2021, Turning Point Brands Canada, a VIE for which the Company obtained is considered the primary beneficiary, purchased 100% of the equity interests of Westhem Ventures LTD d/b/a 30% stakeDirect 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 ReCreation for $1 million paid at closing. In November 2020,that operates in markets not primarily served by Turning Point Brands Canada. The acquisition expands Turning Point Brands Canada’s markets in Canada. On April 13, 2021, in connection with the acquisition of DVW, the Company invested an additional $1 million related to our 30% stake. In November 2020, The 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$3.7 million unsecured loan to ReCreationTurning Point Brands Canada bearing interest at 8% per annum and maturing November 19, 2022.April 13, 2023. The Company has determined that ReCreationunsecured loan is a VIE due to its required subordinated financial support. The Company has determined it iseliminated in the primary beneficiary due to its 50% equity interest, additional subordinated financing and distribution agreement with ReCreation for the saleconsolidation of the Company’s products. As a result, the Company began consolidating ReCreation effective November 2020.Turning Point Brands Canada. As of March 31, 2021, the Company2022, Turning Point Brands Canada 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 
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Total consideration transferred $3,462 
Adjustments to consideration transferred:    
Cash acquired  (43)
Accrued consideration  472 
Adjusted consideration transferred  3,891 
Assets acquired:    
Working capital (primarily AR and inventory)  1,334 
Fixed assets and Other long term assets  27 
Net assets acquired $1,361 
     
Goodwill $2,530 

The goodwill of $5.3$2.5 million consists of the synergies expected from combining the operations and is currently not deductible for tax purposes.

Standard Diversified Inc. (“SDI”) Reorganization
Turning Point Brands Canada
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. $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.

Durfort Holdings

In June 2020,July 2021, the Company purchased certain tobacco assetsinvested an additional $2.3 million in Turning Point Brands Canada increasing its ownership interest to 65%. The Company received board seats aligned with its ownership position. The Company has determined that Turning Point Brands Canada 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 rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USAagreement with Turning Point Brands Canada for $47.7the 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 in total consideration, comprised of $37.7 million in cash, including $1.7 million of capitalized transaction costs, and a $10.0decrease in Additional paid-in capital of $1.1 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 of 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 millionAt March 31, 2022 and sale of €21.4 million with maturity dates ranging from December 2020 to November 2021. At March 31, 2021, the Company had 0 forward contracts for the purchase of €13.1 million and sale of €14.3 million. The foreign currency contracts’ fair value at March 31, 2021, resulted in an asset of $outstanding.0.1 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. 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 $0.2 million were reclassified into interest expense for the three months ended March 31, 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 andyear. As of March 31, 2022, the fair value of the Senior Secured Notes approximateapproximated their carrying value of $250 million due to the recency of the notes’ issuance, related to the quarter ended March 31, 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.2022. As of December 31, 2020,2021, the fair value of the 2018 First Lien Term LoanSenior Secured Notes approximated $130.0 million. The Company prepaid all outstanding amountstheir carrying value of $250 million due to the recency of the notes’ issuance, related to the 2019 First Lien Credit Facility in the first quarterDecember 31, 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 $156.4160.9 million, with a carrying value of $172.5 million as of March 31, 20212022. As of December 31, 20202021, the fair value of the Convertible Senior Notes approximated $155.3159.8 million, with a carrying value of $172.5 million.

Note Payable – Promissory Note

The fair value of the Promissory Note approximates its carrying value of $10.0 million due to the recency of the note’s issuance, related to the quarter ended March 31, 2021.

Note Payable – Unsecured Loan

The fair value of the Unsecured Note approximates its carrying value of $7.5 million due to the recency of the note’s issuance, related to the quarter ended March 31, 2021.

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

Foreign Exchange

At March 31, 2021, the Company had forward contracts for the purchase of €13.1 million and sale of €14.3 million. The fair value of the foreign exchange contracts are 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 $0.1 million and a liability of $0.0 million as of March 31, 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 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 months ended March 31, 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 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 

(a)There was no LIFO impact for the three months ended March 31, 2020.

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 

 
March 31,
2022
  
December 31,
2021
 
Raw materials and work in process $7,483  $6,936 
Leaf tobacco  47,733   35,900 
Finished goods - Zig-Zag Products  28,928   25,663 
Finished goods - Stoker’s Products  11,142   8,959 
Finished goods - NewGen products  9,167   8,591 
Other  1,405   1,558 
Inventories $105,858  $87,607 

The inventory valuation allowance was $9.6$5.4 million and $9.9$7.7 million as of March 31, 2021,2022, and December 31, 2020,2021, 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 
 
March 31,
2022
  
December 31,
2021
 
Inventory deposits $9,245  $12,091 
Insurance deposit  3,000   3,000 
Other  13,418   11,655 
Total $25,663  $26,746 

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 


 
March 31,
2022
  
December 31,
2021
 
Land $22  $22 
Buildings and improvements  3,096   3,096 
Leasehold improvements  5,389   5,374 
Machinery and equipment  22,322   19,591 
Furniture and fixtures  9,380   9,402 
Gross property, plant and equipment  40,209   37,485 
Accumulated depreciation  (19,642)  (18,835)
Net property, plant and equipment $20,567  $18,650 

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 


 
March 31,
2022
  
December 31,
2021
 
Equity investments $25,617  $25,649 
Debt security investment 
8,000  
8,000
 
Other  1,400   1,750 
Total $35,017  $35,399 

The Company records its equity investments without a readily determinable fair value, that are not accounted for under the equity method, at cost, with adjustments for impairment and observable price changes.
In July, 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 March 31, 2022. 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 March 31, 2022. The Company has classified the debt security with Old Pal as available for sale. The Company records the debt security at fair value and includes unrealized gains and losses recorded in stockholders’ equity as a component of accumulated other comprehensive income on our Consolidated Balance Sheets. The Company reports interest income on available for sale debt securities, in interest income in our Consolidated Statements of Income. The fair value of the debt security approximated its carrying value of $8.0 million at March 31, 2022 and December 31, 2021, due to the recency of the debt security’s purchase, related to each such date. The Company has recorded accrued interest receivable of $0.2 million and $0.1 million at March 31, 2022 and December 31, 2021, respectively, in other current assets on our Consolidated Balance Sheets.

In April 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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Table of Contents
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 


 
March 31,
2022
  
December 31,
2021
 
Accrued payroll and related items $4,768  $6,974 
Customer returns and allowances  6,257   6,497 
Taxes payable  5,269   2,053 
Lease liabilities  3,034   2,976 
Accrued interest  2,724   7,318 
Other  7,869   7,119 
Total $29,921  $32,937 
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Table of Contents


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 

 
March 31,
2022
  
December 31,
2021
 
Senior Secured Notes $250,000  $250,000 
Convertible Senior Notes  172,500   172,500 
Gross notes payable and long-term debt  422,500   422,500 
Less deferred finance charges  (7,709)  (8,328)
Notes payable and long-term debt $414,791  $414,172 

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.

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

The Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Indenture. The Indenture provides for customary events of default. The Company was in compliance with all covenants as of March 31, 2022.

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 2021 Revolving Credit Agreement provides for customary events of default. The Company was in compliance with all covenants as of March 31, 2022.

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.

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.

22

2018 First Lien Credit Facility: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 3,205,8953,209,690 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of 18.58518.607 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.81$53.74 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, 2021.2022.

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.

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$53.74 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.

23

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, 2020The Principal Amount is payableCompany prepaid all outstanding amounts under and terminated the Promissory Note in 2 $5.0the third quarter of 2021 in the amount of $9.6 million. The transaction resulted in a $0.4 million installments, with the first installment due 18 months after the closing dategain on extinguishment of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment is subject to reduction for certain amounts payable to the Company as a holdback.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 iswas scheduled to mature on April 17, 2022 and hashad 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 extinguishment of the unsecured loan occurred in the fourth quarter of 2021, resulting in a $7.5 million gain on extinguishment of debt. The Company is subject to audit relating to the unsecured loan until 2027 which could result in repayment of some or all of the unsecured loan previously forgiven. However, the Company believes that repayment of any amount is not probable.

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 pending agreement with the sellers of any indemnification obligations.

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,  Three Months Ended March 31, 
 2021  2020  2022  2021 
Operating lease cost            
Cost of sales $225  $233  $227  $225 
Selling, general and administrative  752   398   690   752 
Variable lease cost (1)  205   312   112   205 
Short-term lease cost  11   83   14   11 
Sublease income  (30)  (30)  0  (30)
Total $1,163  $996  $1,043  $1,163 

(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.
24



 
March 31,
2021
  
December 31,
2020
  
March 31,
2022
  
December 31,
2021
 
Assets:            
Right of use assets $17,406  $17,918  $14,405  $15,053 
Total lease assets $17,406  $17,918  $14,405  $15,053 
                
Liabilities:                
Current lease liabilities (2)
 $3,269  $3,228  $3,034  $2,976 
Long-term lease liabilities  15,570   16,117   12,625   13,336 
Total lease liabilities $18,839  $19,345  $15,659  $16,312 

(2)Reported within accrued liabilities on the balance sheet

 As of March 31,  As of March 31, 
 2021  2020  2022  2021 
Weighted-average remaining lease term - operating leases 7.1 years  7.8 years  6.5 years  7.1 years 
Weighted-average discount rate - operating leases  4.93%  5.84%  4.88%  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, 2021,2022, 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 
 
March 31,
2022
 
2022 $2,775 
2023  3,635 
2024  2,460 
2025  2,145 
2026  2,085 
Years thereafter  5,343 
Total lease payments $18,443 
Less: Imputed interest  2,784 
Present value of lease liabilities $15,659 

25
22


Note 13. Income Taxes

The Company’s effective income tax rate for the three months ended March 31, 2022, was 23.7% which includes a discrete tax deduction of $0.4 million for the three months ended March 31, 2022 relating to stock option exercises. The Company’s effective income tax rate for the three months ended March 31, 2021, was 18.7% which includes a discrete tax deduction of $3.3 million for the three months ended March 31, 2021 relating to stock option exercises. The Company’s effective income tax rate for the three months ended March 31, 2020, was 23.8% which includes a discrete tax deduction of $0.7 million for the three months ended March 31, 2020 relating to stock option exercises.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)


Note 15.14. 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, 2021,2022, net of forfeitures, there were 0 awards 87,367 Restricted Stock Units (“RSUs”), 95,229 options and 18,229 Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 1,290,0001,189,227 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 becould have been granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan providesprovided 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. TheUpon adoption of the 2021 Plan, the 2015 Plan is administered bywas terminated, and the Committee. The Committee determines the vesting criteria for the awards, with such criteria toCompany 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. The 2015 Plan was administrated by the Committee.

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, 2020  711,060  $19.58  $6.42 
             
Granted  119,500   50.93   13.58 
Exercised  (202,768)  10.22   6.35 
Forfeited  (7,957)  33.22   9.63 
Outstanding, December 31, 2021
  619,835   28.51   8.70 
             
Granted  100,000   30.46   10.23 
Exercised  (25,166)  16.14   4.89 
Forfeited  (7,217)  29.53   8.13 
Outstanding, March 31, 2022
  687,452  $29.23  $9.07 

Under the 2006, 2015 and 20152021 Plans, the total intrinsic value of options exercised during the three months ended March 31, 2022 and 2021, was $0.4 million, and 2020, was $3.3 million, and $0.9 million, respectively.

At March 31,2021,31, 2022, under the 2006 Plan, the outstanding stock options’ exercise price for 133,612the 86,377 outstanding 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 2.892.19 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, 2021,2022, 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 March 31, 2022
  20,000   46,483   58,667   142,284   25,000   94,612   94,529   12,000 
Number exercisable at March 31, 2022
  20,000   46,483   58,667   142,284   25,000   62,148   39,386   4,080 
Exercise price $13.00  $15.41  $21.21  $47.58  $20.89  $14.85  $51.75  $47.76 
Remaining lives  4.87   5.13   5.94   6.98   7.57   7.97   8.89   9.10 
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
  
March 14,
2022
 
Number of options granted  7,500   100,000 
Options outstanding at March 31, 2022
  7,500   100,000 
Number exercisable at March 31, 2022
  2,550   0 
Exercise price $45.05  $30.46 
Remaining lives  9.13   9.96 
Risk free interest rate  0.84%  2.10%
Expected volatility  31.50%  35.33%
Expected life  6.000   6.000 
Dividend yield  0.63%  1.01%
Fair value at grant date $13.23  $10.23 

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$0.2 million and $0.2$0.3 million for the three months ended March 31, 20212022 and 2020,2021, respectively. Total unrecognized compensation expense related to options at March 31, 2021,2022, is $1.7$1.5 million,, which will be expensed over 2.362.38 years.

Performance-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, 20212022, there are 563,911477,547 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of March 31, 20212022.

 
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 7,
2018
  
March 20,
2019
  
July 19,
2019
  
March 18,
2020
  
December 28,
2020
  
February 18,
2021
  
March 14,
2022
 
Number of PRSUs granted  96,000   92,500   88,582   94,000   88,169   100,000   49,996 
PRSUs outstanding at March 31, 2022
  89,600   77,380   21,342   86,610   58,779   93,840   49,996 
Fair value as of grant date $21.21  $47.58  $52.15  $14.85  $46.42  $51.75  $30.46 
Remaining lives  0.75   1.75   0.75   2.75   1.75   3.75   4.75 

The Company recorded compensation expense related to the PRSUs of approximately $1.20.8 million and $0.21.2 million in the consolidated statements of income for the three months ended March 31,202131, 2022 and 20202021, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31, 20212022, is $12.66.2 million which will be expensed over the service periods based on the probability of achieving the performance condition.


The Company has granted 87,367 RSUs which vest over one to five years. The following table outlines the RSUs granted and outstanding as of March 31, 2022.


  
May 4,
2021
  
July 23,
2021
  
March 14,
2022
  
March 14,
2022
 
Number of RSUs granted  7,478   1,159   50,004   28,726 
RSUs outstanding at March 31, 2022  7,478   1,159   50,004   28,726 
Fair value as of grant date $47.86  $51.81  $30.46  $30.46 
Remaining lives  0.09   0.31   4.75   2.75 



The Company has recorded compensation expense related to the RSUs based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the RSUs on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the RSUs of approximately $0.2 million for the three months ended March 31, 2022. Total unrecognized compensation expense related to RSUs at March 31, 2022, is $2.4 million, which will be expensed over 3.96 years.

Note 16.15. 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-liquidsbatteries 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.matter. 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.

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

We have reached an agreement to arbitrate a responding party in an arbitrationclaim brought by a 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 franchisee represented by the same firm that represents the plaintiff in the action described above.former franchisee. This casematter 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 suitfranchisor’s ultimate termination of the franchise agreement for multiple uncured material defaults by the franchisee 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.proper. We also believe we have good and valid substantive defenses against the claims and intend on vigorously defending our interests in this matter.


Note 17.16. 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,  Three Months Ended March 31, 
 2021  2020  2022  2021 
 Income  Shares  
Per
Share
  Income  Shares  
Per
Share
  Income  Shares  
Per
Share
  Income  Shares  
Per
Share
 
Basic EPS:                                    
Numerator                                    
Net income attributable to Turning Point Brands, Inc. $11,783        $4,499        $10,998        $11,783       
                                        
Denominator                                        
Weighted average      19,093,961  $0.62       19,689,446  $0.23       18,257,695  $0.60       19,093,961  $0.62 
                                                
Diluted EPS:                                                
Numerator                                                
Net income attributable to Turning Point Brands, Inc. $11,783          $4,499          $10,998          $11,783         
Interest expense related to Convertible Senior Notes, net of tax  1,054           0           1,054           1,054         
Diluted net income attributable to Turning Point Brands. Inc. $12,837          $4,499          $12,052          $12,837         
                                                
Denominator                                                
Basic weighted average      19,093,961           19,689,446           18,257,695           19,093,961     
Convertible Senior Notes      3,205,895           0           3,209,690           3,205,895     
Stock options      365,211           417,354           282,125           365,211     
      22,665,067  $0.57       20,106,800  $0.22       21,749,510  $0.55       22,665,067  $0.57 

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.


Note 18.17. 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 segmentCorporate unallocated 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.As a result of a change in the Company’s chief operating decision maker (“CODM”), resulting from the hiring of a new Chief Executive Officer in the first quarter of 2022, certain general and administrative costs previously included to the NewGen Products segment are now included in Corporate unallocated to align with new management and reporting structures in the Company and better reflect how performance is now evaluated and resources are allocated by the CODM. Amounts in the prior year period have not been adjusted. Had such prior period amounts been adjusted, approximately $0.9 million of costs for the three months ended March 31, 2021 previously reported in the NewGen Products segment would have been reported in Corporate unallocated.



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.




The tables below present financial information about reported segments:

 Three Months Ended March 31, 
 
Three Months Ended
March 31,
  2022
  2021
 
 2021  2020       
Net sales            
Zig-Zag products $41,004  $28,914  
$
45,672
  
$
41,004
 
Stoker’s products  29,255   26,495   
31,703
   
29,255
 
NewGen products  37,382   35,280   
23,519
   
37,382
 
Total $107,641  $90,689  
$
100,894
  
$
107,641
 
                
Gross profit                
Zig-Zag products $24,896  $16,132  $26,343  $24,896 
Stoker’s products  15,892   13,874   17,686   15,892 
NewGen products  12,473   11,425   7,765   12,473 
Total $53,261  $41,431  
$
51,794
  
$
53,261
 
                
Operating income (loss)                
Zig-Zag products $19,437  $12,417  
$
18,737
  
$
19,437
 
Stoker’s products  12,255   9,746   
13,506
   
12,255
 
NewGen products  2,006   477   
678
   
2,006
 
Corporate unallocated (1)(2)
  (9,349)  (13,603)  
(13,692
)
  
(9,349
)
Total $24,349  $9,037  
$
19,229
  
$
24,349
 
                
Interest expense, net  4,486   3,309   
5,196
   
4,486
 
Investment income  (25)  (91)  
(78
)
  
(25
)
Loss on extinguishment of debt  5,706   0   
0
   
5,706
 
Net periodic income, excluding service cost  0   (87)
        
Income before income taxes $14,182  $5,906  
$
14,111
  
$
14,182
 
                
Capital expenditures                
Zig-Zag products $0  $0  
$
2,323
  
$
0
 
Stoker’s products  840   860   
464
   
840
 
NewGen products  2   17   
0
   
2
 
Total $842  $877  
$
2,787
  
$
842
 
                
Depreciation and amortization                
Zig-Zag products $114  $0  
$
92
  
$
114
 
Stoker’s products  635   519   
767
   
635
 
NewGen products  516   757   
475
   
516
 
Total $1,265  $1,276  
$
1,334
  
$
1,265
 


(1)
Includes corporate costs that are not allocated to any of the 3 reportable segments.

(2)Includes costs related to PMTA of $5.9$1.1 million in 2020.2022 and $0.3 million in 2021.

31
29


 
March 31,
2022
  
December 31,
2021
 
Assets      
Zig-Zag products 
$
227,989
  
$
227,554
 
Stoker’s products  
172,400
   
142,334
 
NewGen products  
61,529
   
72,746
 
Corporate unallocated (1)
  
156,785
   
158,926
 
Total
 
$
618,703
  
$
601,560
 



 
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
March 31,
 
  2022
  2021
 
       
Business to Business
 
$
19,124
  
$
27,257
 
Business to Consumer - Online
  
4,233
   
10,033
 
Other
  
162
   
92
 
Total
 
$
23,519
  
$
37,382
 



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
March 31,
 
  2022
  2021
 
Domestic $93,766  $100,127 
Foreign  7,128   7,514 
Total $100,894  $107,641 
32
Note 19.18. Dividends and Share Repurchase

The most recent dividend of $0.055$0.06 per common share was paid on April 9, 2021,8, 2022, to shareholders of record at the close of business on March 19, 2021.18, 2022.

Dividends are considered restricted payments under the Senior Secured Notes Indenture and 2021 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. On October 25,2021, the Board increased the approved share repurchase program by $30.7 million. On February 24,2022, the Board increased the approve share repurchase program by $24.6 million. The program is subject to the ongoing discretion of the Board. The total number of shares repurchased for the three months ended March 31, 2021,2022, was 119,031310,224 shares for a total cost of $5.7$10.6 million and an average price per share of $48.16. $34.1$34.24.$45.8 million remains remained available for share repurchases under the program at March 31, 2021.2022.

Note 20. Subsequent Events

On April 19, 2021, the Company invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural30® 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.

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® toand 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-digitmid-single-digit consumer unit growth in 2020over the year period ending 2021 as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and information company. Our three focus segments are led by our 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®) along with Solace®in the NewGen Products segment. Our businesses generate solid cash flowflows which we use to invest in our business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We currently ship to approximately 800 distributors with an additional 200 secondary, indirect wholesalers in the U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

We 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, 2020,2021, our products are available in approximately 190,000195,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 210,000215,000 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.

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.

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, ourOur 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 in 2019 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;income and other conditions affecting purchasing power such as inflation;
Price sensitivity in our end-markets;
Cost and increasing regulation of promotional and advertising activities;
Cost of complying with regulation, including the “deeming regulations”regulation”;
Increasing and unpredictable regulation of NewGen products;
Counterfeit and other illegal products in our end-markets;
Currency fluctuations;
Our ability to identify attractive acquisition opportunities; and
Our ability to successfully integrate acquisitions.

Recent Developments

Senior Secured NotesNon-Tobacco Nicotine Included Under Jurisdiction of FDA’s Center for Tobacco Products

New legislation enacted on March 15, 2022, provides authority for the FDA to regulate tobacco products containing nicotine from any source (“NTN Products”). This law takes effect April 14, 2022, and 2021 Revolving Credit Facilityrequires NTN Products to comply with applicable requirements under the Federal Food, Drug, and Cosmetic Act, such as not selling to persons under 21 years of age, not marketing these products as modified risk tobacco products without FDA’s authorization, and not distributing free samples. Additionally, NTN Products in the market between March 15, 2022, and April 14, 2022, must file a premarket tobacco application by May 14, 2022. NTN Products subject of a timely-filed PMTA, and not in receipt of a negative action, may remain on the market until July 13, 2022. After July 13, 2022, these products are subject to enforcement. We have begun preparing premarket filings for certain of our NTN Products and intend to submit these applications by the May 14, 2022, deadline. After submission, we will continue to supplement these filings with additional information to support a finding that the marketing of these products is “appropriate for the protection of public health.”

CLIPPER®Lighters

In February 2022, we entered into an agreement with Flamagas, a renowned lighter manufacturer, for exclusive distribution of CLIPPER® lighters in the United States and Canada.

Final Rule Related to PACT Act Published

On February 11,October 21, 2021, we closedthe United States Postal Service (“USPS”) published a private offering (the “Offering”)Final Rule entitled “Treatment of $250 million aggregate principal amountE-Cigarettes in the Mail,” which followed its earlier publication 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 maturethe Proposed Rule 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,19, 2021. This Final Rule was required 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 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.

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 isinclusion 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 safetymailing of “cigarettes” via USPS to ENDS products, other than the Consumer Testing and well-beingPublic Health exceptions. Specifically, the Final Rule extends the following exceptions to the prohibition on mailing of our colleaguesENDS products: the Business/Regulatory Purposes Exception, the Certain Individuals Exception, and the communitiesexception for intra-Alaska and customers we serve. As an organization, weintra-Hawaii shipments. We have implemented several changesreceived certain shipping exemptions from carrier services 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 changedcarry the way we communicate through increased use of videoconferencingaffected freight 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 putcreated a hold on new spending commitments as we cautiously manage through this environment.supplemental logistical network for those shipments not covered by the exemptions.

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.

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 20202021 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 issuedThere are no recent accounting pronouncements including those recently adopted.that impact the Company.

Results of Operations

Comparison of the Three Months Ended March 31, 2021,2022, to the Three Months Ended March 31, 20202021

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

 Three Months Ended March 31,  Three Months Ended March 31, 
 2021  2020  % Change  2022 2021 % Change 
Consolidated Results of Operations Data:                
Net sales                
Zig-Zag products $41,004  $28,914   41.8% $45,672 $41,004 11.4%
Stoker’s products  29,255   26,495   10.4% 31,703 29,255 8.4%
NewGen products  37,382   35,280   6.0%  23,519  37,382 -37.1%
Total net sales  107,641   90,689   18.7% 100,894 107,641 -6.3%
Cost of sales  54,380   49,258   10.4%  49,100  54,380 -9.7%
Gross profit                   
Zig-Zag products  24,896   16,132   54.3% 26,343 24,896 5.8%
Stoker’s products  15,892   13,874   14.5% 17,686 15,892 11.3%
NewGen products  12,473   11,425   9.2%  7,765  12,473 -37.7%
Total gross profit  53,261   41,431   28.6% 51,794 53,261 -2.8%
                   
Selling, general, and administrative expenses  28,912   32,394   -10.7%  32,565  28,912 12.6%
Operating income  24,349   9,037   169.4% 19,229 24,349 -21.0%
Interest expense, net  4,486   3,309   35.6% 5,196 4,486 15.8%
Investment income  (25)  (91)  -72.5% (78) (25) 212.0%
Loss on extinguishment of debt  5,706   -  NM   -  5,706 -100.0%
Net periodic income, excluding service cost  -   (87)  -100.0%
Income before income taxes  14,182   5,906   140.1% 14,111 14,182 -0.5%
Income tax expense  2,654   1,407   88.6%  3,340  2,654 25.8%
Consolidated net income  11,528   4,499   156.2% 10,771 11,528 -6.6%
Net loss attributable to non-controlling interest  (255)  -       (227)  (255) -11.0%
Net income attributable to Turning Point Brands, Inc. $11,783  $4,499      $10,998 $11,783 -6.7%

Net Sales:  For the three months ended March 31, 2021,2022, consolidated net sales increaseddecreased to $107.6$100.9 million from $90.7$107.6 million for the three months ended March 31, 2020, an increase2021, a decrease of $17.0$6.7 million or 18.7%6.3%. The increasedecrease in net sales was driven by increaseddecreased sales volume across all segments, primarily in the Zig-ZagNewGen Products segment.

For the three months ended March 31, 2021,2022, net sales in the Zig-Zag Products segment increased to $41.0$45.7 million from $28.9$41.0 million for the three months ended March 31, 2020,2021, an increase of $12.1$4.7 million or 41.8%11.4%. For the three months ended March 31, 2021,2022, volume increased 36.9%7.1% and price/mix increased 5.0%4.3%. The increase in net sales was primarily related todriven 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, 2021,2022, net sales in the Stoker’s Products segment increased to $29.3$31.7 million from $26.5$29.3 million for the three months ended March 31, 2020,2021, an increase of $2.8$2.4 million or 10.4%8.4%. For the three months ended March 31, 2021,2022, volume increased 5.1%0.3% and price/mix increased 5.3%8.1%. The increase in net sales was driven by the continuing double-digit volume growth of Stoker’s® MST and low single-digit growth of loose-leaf chewing tobacco.MST.

For the three months ended March 31, 2021,2022, net sales in the NewGen products segment increaseddecreased to $37.4$23.5 million from $35.3$37.4 million for the three months ended March 31, 2020, an increase2021, a decrease of $2.1$13.9 million or 6.0%37.1%. The increasedecrease in net sales was primarily the result of growthdeclines in both the vape distribution businesses and Nu-X.businesses.

Gross Profit:  For the three months ended March 31, 2021,2022, consolidated gross profit increaseddecreased to $53.3$51.8 million from $41.4$53.3 million for the three months ended March 31, 2020, an increase2021, a decrease of $11.8$1.5 million or 28.6%2.8%. Gross profit as a percentage of revenue increased to 51.3% for the three months ended March 31, 2022, compared to 49.5% for the three months ended March 31, 2021 compared to 45.7% for the three months ended March 31, 2020 driven by increased margin in the Zig-ZagStoker’s Products segment and mix as a result of the Durfort transaction.NewGen Products segment generates lower margins.

For the three months ended March 31, 2021,2022, gross profit in the Zig-Zag Products segment increased to $24.9$26.3 million from $16.1$24.9 million for the three months ended March 31, 2020,2021, an increase of $8.8$1.4 million or 54.3%5.8%. Gross profit as a percentage of net sales increaseddecreased to 57.7% of net sales for the three months ended March 31, 2022, from 60.7% of net sales for the three months ended March 31, 2021, as a result of the consolidation of DVW in Turning Point Brands Canada in the current year period which operates at lower margins than our traditional business.

For the three months ended March 31, 2022, gross profit in the Stoker’s Products segment increased to $17.7 million from $15.9 million for the three months ended March 31, 2022, an increase of $1.8 million or 11.3%. Gross profit as a percentage of net sales increased to 55.8% 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 million2022, 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, 2020, primarily as a result of strong incremental margin contribution of MST.

For the three months ended March 31, 2021,2022, gross profit in the NewGen products segment increaseddecreased to $12.5$7.8 million from $11.4$12.5 million for the three months ended March 31, 2020, an increase2021, a decrease of $1.0$4.7 million or 9.2%37.7%. Gross profit as a percentage of net sales increaseddecreased to 33.0% of net sales for the three months ended March 31, 2022, from 33.4% of net sales for the three months ended March 31, 2021, from 32.4% of net sales for the three months ended March 31, 2020.2021.

Selling, General, and Administrative Expenses:  For the three months ended March 31, 2021,2022, selling, general, and administrative expenses decreasedincreased to $28.9$32.6 million from $32.4$28.9 million for the three months ended March 31, 2020, a decrease2021, an increase of $3.5$3.7 million or 10.7%12.6%. Selling, general and administrative expenses in the three months ended March 31, 2022, included $1.2 million of stock options, restricted stock and incentives expense, $0.4 million of transaction expense, $1.1 million of expense related to PMTA, $1.3 million of expense related to corporate restructuring and $0.3 million of expense related to the scoping of the new ERP and CRM systems. Selling, general and administrative expenses in the three months ended March 31, 2021, included $1.5 million of stock options, restricted stock and incentives expense and $0.6 million of transaction expenses. Selling, general and administrative expenses in the three months ended March 31, 2020 included $0.5 million of stock option, restricted stock and incentives expense, $1.0$0.6 million of transaction costs and $5.9$0.3 million of expense related to PMTA, which was the primary driver for the decrease in year-over-year selling, general, and administrative expenses.PMTA.

Interest Expense, net:  For the three months ended March 31, 2021,2022, interest expense, net increased to $4.5$5.2 million, from $3.3$4.5 million for the three months ended March 31, 20202021 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 increasedincrease in the Company’s outstanding debt.debt in February 2021.

Investment Income:  For the three months ended March 31, 2021,2022, investment income decreasedincreased to $0.0$0.1 million, from $0.1$0.0 million for the three months ended March 31, 2020.2021.

Loss on Extinguishment of Debt: There was $5.7 millionno loss on extinguishment of debt for the three months ended March 31, 2022 compared to $5.7 million for the three months ended March 31, 2021 related to the repayment of the 2018 First Lien Credit Facility, compared to $0.0 million for the three months ended March 31, 2020.

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

Income Tax Expense:  Our income tax expense of $2.7$3.3 million was 18.7%23.7% of income before income taxes for the three months ended March 31, 20212022 and included a discrete tax benefit of $3.3$0.4 million relating to stock option exercises. Our effective income tax rate was 23.8%18.7% for the three months ended March 31, 20202021 and included a discrete tax deduction $0.7benefit $3.3 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest:  Net loss attributable to non-controlling interest was $0.2 million for the three months ended March 31, 2022 compared to $0.3 million for the three months ended March 31, 2021 compared2021.

Net Income Attributable to $0.0 millionTurning Point Brands, Inc.:  Due to the factors described above, net income attributable to Turning Point Brands, Inc. for the three months ended March 31, 2020.

Consolidated Net Income:  Due to the factors described above, consolidated net income for the three months ended March 31,2022 and 2021, and 2020, was $11.8$11.0 million and $4.5$11.8 million, respectively.

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 financialdebt instruments contain covenants which use Adjusted EBITDA calculations, and manycalculations.

35

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.

  Three Months Ended 
(in thousands) March 31, 
  2022  2021 
Net income attributable to Turning Point Brands, Inc. $10,998  $11,783 
Add:        
Interest expense, net  5,196   4,486 
Loss on extinguishment of debt  -   5,706 
Income tax expense  3,340   2,654 
Depreciation expense  871   788 
Amortization expense  463   477 
EBITDA $20,868  $25,894 
Components of Adjusted EBITDA        
Corporate restructuring (a)  1,332   - 
ERP/CRM (b)
  330
   -
 
Stock options, restricted stock, and incentives expense (c)  1,159   1,498 
Transactional expenses (d)  425   607 
FDA PMTA (e)  1,139   - 
Adjusted EBITDA $25,253  $27,999 

  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)costs associated with corporate restructuring, including severance.
(b)Represents costs associated with scoping new ERP and foreign exchange hedging.CRM systems.
(b) 
(c)Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units.
(c) 
(d)Represents the fees incurred for transaction expenses.
(d)
(e)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, 2021,2022, we had $167.4$126.0 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$1.0 million to $68.6$81.5 million at March 31, 2021,2022, compared with $65.0$80.5 million at December 31, 2020. The increase was primarily due to the decrease in the current portion of long-term debt.2021.

 As of  As of 
(in thousands) March 31,  December 31,  
March 31,
2022
 
December 31,
2021
 
 2021  2020 
           
Current assets $129,823  $121,638  $140,971 $120,849 
Current liabilities  61,216   56,629   59,423  40,336 
Working capital $68,607  $65,009  $81,548 $80,513 

Cash Flows from Operating Activities

For the three months ended March 31, 2021,2022, net cash provided by operating activities was $24.2$13.0 million compared to net cash provided by operating activities of $14.7$24.2 million for the three months ended March 31, 2020, an increase2021, a decrease of $9.5$11.2 million, primarily due to higherlower net income resulting from increased sales.due to decreased sales combined with the timing of changes to working capital.

Cash Flows from Investing Activities

For the three months ended March 31, 2021,2022, net cash used in investing activities was $15.8$11.3 million compared to net cash used in investing activities of $0.9$15.8 million for the three months ended March 31, 2020, an increase2021, a decrease of $14.9$4.5 million, primarily due to the purchaselower purchases of investments in our MSA escrow account which reflects the change in restricted cash.partially offset by increased capital expenditures.

Cash Flows from Financing Activities

For the three months ended March 31, 2021,2022, net cash used in financing activities was $12.5 million compared to net cash provided by financing activities wasof $102.1 million compared to net cash used in financing activities of $9.7 million for the three months ended March 31, 2020,2021, an increasedecrease in cash flow of $111.8$114.6 million, primarily due to the increase in repurchases of common stock during 2022 compared to net proceeds received 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.

Dividends and Share Repurchase

The most recent dividend of $0.055$0.06 per common share was paid on April 9, 2021,8, 2022, to shareholders of record at the close of business on March 19, 2021.18, 2022.

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. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million. On February 24, 2022, the Board increased the approve share repurchase program by $24.6 million. The program is subject to the ongoing discretion of the Board. The total number of shares repurchased for the three months ended March 31, 2021,2022, was 119,031310,224 shares for a total cost of $5.7$10.6 million and an average price per share of $48.16. $34.1$34.24. $45.8 million remains available for share repurchases under the program at March 31, 2021.2022.

Long-Term Debt

As of March 31, 2021,2022, 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 
       
March 31,
2022
 
December 31,
2021
 
Senior Secured Notes $250,000  $-  $250,000 $250,000 
2018 First Lien Term Loan  -   130,000 
Convertible Senior Notes  172,500   172,500   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  422,500 422,500 
Less deferred finance charges  (10,183)  (5,873)  (7,709)  (8,328)
Less current maturities  (5,000)  (12,000)
Notes payable and long-term debt $424,802  $302,112  $414,791 $414,172 

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.

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.

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. The Indenture provides for customary events of default. We were in compliance with all covenants as of March 31, 2022.

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.

2021 Revolving Credit Facility

In connection with the Offering, we also entered into a new $25$25.0 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. The 2021 Revolving Credit Agreement provides for customary events of default. We were in compliance with all covenants as of March 31, 2022.

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.

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 3,205,8953,209,690 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.58518.607 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.81$53.74 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, 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 2020-06.2022.

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$53.74 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.

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. 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 Principal Amount is payabletransaction resulted in two $5.0a $0.4 million installments, with the first installment due 18 months after the closing dategain on extinguishment of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment is subject to reduction for certain amounts payable to us as a holdback.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.loan issued pursuant to the CARES Act. The proceeds of the loan were received on April 27, 2020. The loan iswas scheduled to mature on April 17, 2022 and hashad a 1.00% interest rate. Under the CARES Act we were permitted to apply for forgiveness of the loan if the proceeds were used as required for certain purposes. During 2021, we applied for forgiveness for the loan. On October 15, 2021, we received notice that our application for forgiveness was fully approved. The extinguishment of the unsecured loan occurred in the fourth quarter of 2021 resulting in a $7.5 million gain on extinguishment of debt. We are subject to audit relating to the unsecured loan until 2027 which could result in repayment of some or all of the unsecured loan previously forgiven. However, we believe that repayment of any amount is not probable.

Off-balance Sheet Arrangements

During the three months ended March 31, 20212022, the Company did not execute any forward contracts. At March 31, 2021, the CompanyWe had no forward contracts for the purchase of €13.1 million and sale of €14.3 million. The fair value of the foreign currency contracts were based on quoted market prices and resulted in an asset of $0.1 million included in Other current assets and liability of $0.0 million included in Accrued liabilities at March 31, 2021.2022. During 2020, the Company executed various2021, we did not execute any 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 Companycontracts. We had no forward contracts for the purchase of €18.0 million and sale of €19.6 million. The fair value of the foreign currency contracts are based on quoted market prices and resulted in an asset of $0.4 million included in Other current assets and liability of $0.0 million included in Accrued liabilities at December 31, 2020.2021.  The Company had no interest rate swap contracts for a notional amount of $70 million at DecemberMarch 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.2022. The Company terminated theits 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

We believe that anyInflation in general and the recent rapid increases in gas prices have had a substantial negative effect on the purchasing power of inflation at current levels will be minimal. Historically,consumers. While 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 towould be abledifficult to do so forin the foreseeable future.current environment. We have implemented price increases in areas where that was feasible. 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.

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 20202021 Annual Report on Form 10-K, during the period. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 20202021 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 20202021 Annual Report on Form 10-K, during the three months ended March 31, 20212022. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 20202021 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.

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, 20212022. Based upon the evaluation, our CEO, CFO, and CAO concluded our disclosure controls and procedures are not effective as of such date due to provide reasonable assurancea material weakness in internal controls over financial reporting that information required to bewas disclosed by us in our Annual Report on Form 10-K for 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.fiscal year ended December 31, 2021.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 20212022 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, we began implementing a remediation plan to address the material weakness mentioned above. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time, and management has concluded through testing that these controls are operating effectively. We expect that the remediation of this material weakness will be completed by the end of the fiscal year 2022.

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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 1615 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 20202021 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 20202021 Annual Report on Form 10-K. There have been no material changes to the Risk Factors set forth in the 20202021 Annual Report on Form 10-K.

Item 2. Unregistered2.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. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million bringing the authority at the time back to $50 million (including approximately $19.3 million available for repurchases under the Board’s previous authorization). On February 24, 2022, the Board increased the approved share repurchase program by $24.6 million bringing total authority at that time to $50 million. 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.

The following table includes information regarding purchases of our common stock made by us during the quarter ended March 31, 20212022 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  
Total Number
of Shares
Purchased (1)
 
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
 
January 1 to January 31  40,498  $44.14   40,498   38,020,412  172,624 $37.20 172,624 $25,410,384 
February 1 to February 28  8,533  $55.98   8,533   37,542,735  28,855 $33.81 5,572 $49,814,062 
March 1 to March 31  100,258  $49.21   70,000   34,075,635   142,832 $30.56  132,028 $45,800,411 
Total  149,289       119,031       344,311    310,224   
(1) The total number of shares purchased includes (a) shares purchased under the February 2020 share repurchase program (which totaled 172,624 shares in January, 5,572 in February and 132,028 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 23,283 shares in February and 10,804 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.

(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
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). *
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. *
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. *
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. *
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. *
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. *
Preferability letter from RMS US, LLP regarding a change in accounting method. *
  
Rule 13a-14(a)/15d-14(a) Certification of Lawrence S. Wexler.Yavor Efremov.*
  
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.*
  
101
XBRL (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,March 31, 2022, filed on OctoberApril 27, 2020,2022, 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

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/ Yavor Efremov 
 By: /s/ Lawrence S. WexlerName: Yavor Efremov
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, 2021April 27, 2022


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