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 Codification (“ASC”) 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~~to be 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 ASC 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 ~~17.~~16, “Segment Information”. An additional disaggregation of contract revenue by sales channel can be found within Note 1716 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately ~~$5.7~~$6.2 million and ~~$5.9~~ $6.1 million for the three months ending March 31, 2023, and 2022, ~~and 2021,~~ respectively.

Inventories

~~Inventories~~

Inventories are stated at the lower of cost or net realizable value using the ~~first-in, first-out~~first-in, first-out (“FIFO”) method. 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~~Company enters into foreign currency ~~forward~~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~~forward period not to exceed twelve months. The Company may also, from time to time, hedge up to ~~90percent~~100% 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~~reclassified 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. The U.S. 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~~Creative Distribution Solutions 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.As of March 31, 2023, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $28.7 million. At December 31, 2022, the Company had on deposit approximately $32.1 million, the fair value of which was approximately ~~$30.2 million. At December 31, 2021, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $31.7~~$28.0 million. The Company discontinued its generic category of MYO in 2019 and its Zig-Zagbranded MYO cigarette smoking tobacco in 2017. Thus, pending a change in MSA legislation, the Company has no remaining product lines covered by the MSA and will not be required to make future escrow deposits.

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.

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Fair values for the U.S. Governmental agency obligations are Level 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, 2023							As of December 31, 2022
			Gross			Estimated				Gross			Estimated
			Unrealized			Fair				Unrealized			Fair
	Cost		Losses			Value		Cost		Losses			Value
Cash and cash equivalents	$	1,929	$	-		$	1,929	$	1,929	$	-		$	1,929
U.S. Governmental agency obligations (unrealized position < 12 months)		2,736		(185	)		2,551		10,226		(1,251	)		8,975
U.S. Governmental agency obligations (unrealized position > 12 months)		27,408		(3,178	)		24,230		19,918		(2,842	)		17,076
	$	32,073	$	(3,363	)	$	28,710	$	32,073	$	(4,093	)	$	27,980

~~Table of Contents~~

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		As of
	March 31, 2022		March 31, 2023
Less than one year	$	0	$	200
One to five years		7,443		11,241
Five to ten years		20,001		16,748
Greater than ten years		956		1,955
Total	$	28,400	$	30,144

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

	Deposits as of				Deposits as of
Sales Year	March 31, 2022		December 31, 2021		March 31, 2023		December 31, 2022
1999	$	211	$	211	$	211	$	211
2000		1,017		1,017		1,017		1,017
2001		1,673		1,673		1,673		1,673
2002		2,271		2,271		2,271		2,271
2003		4,249		4,249		4,249		4,249
2004		3,714		3,714		3,714		3,714
2005		4,553		4,553		4,553		4,553
2006		3,847		3,847		3,847		3,847
2007		4,167		4,167		4,167		4,167
2008		3,364		3,364		3,364		3,364
2009		1,619		1,619		1,619		1,619
2010		406		406		406		406
2011		193		193		193		193
2012		199		199		199		199
2013		173		173		173		173
2014		143		143		143		143
2015		101		101		101		101
2016		91		91		91		91
2017		82		82		82		82

Total	$	32,073	$	32,073	$	32,073	$	32,073

~~Food and Drug Administration (FDA):~~Table of Contents

FDA: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “~~FSPTCA~~”“FSPTCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of 4four 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 also regulate cigars, pipe tobacco, e-cigarettes, vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA.

~~Table of Contents~~

The FDA assesses tobacco product user fees on ~~6 classes~~six classes 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~~.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~~Creative Distribution Solutions 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 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.

Subsequently, on April 14, 2022, the FDA Center for Tobacco Products also obtained jurisdiction over non-tobacco nicotine products (“NTN Products”), including synthetic nicotine. That law 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 without authorization, and not distributing free samples of these products. Additionally, NTN Products became subject to premarket filing requirements. Under the new law, manufacturers were required to file a Premarket Tobacco Application (“PMTA”) by May 14, 2022, in order to continue selling products currently on the market. NTN Products subject of a timely-filed PMTA, and not in receipt of a negative action, were allowed to remain on the market until July 13, 2022, at which time these products became subject to enforcement, similar to tobacco-derived products remaining under review.

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 have continued to supplement these applications 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. We submitted premarket filings prior to the September 9, 2020 deadline for certain of our tobacco and tobacco-derived products, all of which remain under review. We likewise filed premarket submissions for certain of our NTN Products ahead of the May 14, 2022 deadline. We have continued to supplement these applications with additional information; however, there can be no guarantee that the FDA will accept such amendments or that the applications will meet the standard of “appropriate for the protection of public health.” The FDA has indicated its enforcement priority is those applicants who have received negative action on their application, such as a Marketing Denial Order or Refuse to File notification and who continue to illegally sell those unauthorized products, as well as products for which manufacturers failed to submit a marketing application. Despite these stated enforcement priorities, given the FDA’s limited resources we expect that for a period of time 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. There can be no guarantee that the FDA will not shift its enforcement priorities or that it will increase in ability to enforce against unauthorized products over time.

The FDA has issued a number of ~~proposed~~ rules related to premarket filings; however, those rules were not finalized prior to the September 9, 2020, deadline. On October 5, 2021, the FDA finalized 2 two rules related to the Substantial Equivalence process and the Premarket Tobacco Product Application process, respectively, which both ~~become~~became effective November 4, 2021. Both final rules (collectively, the ~~“Rules��~~“Rules”) indicate that any new or additional requirements will not retroactively apply to currently pending ~~PMTAs;~~PMTAs for tobacco and tobacco-derived products; however, the information outlined in the rule remains important to the FDA’s substantive review of an application. The FDA has yet to indicate how it might apply these Rules to NTN Product filings. We believe we have products that meet the Rules and have filed premarket filings supporting a showing of the respective required standards. However, there is no assurance that the FDA’s guidance or regulations will not change, or that the FDA will not prioritize its enforcement in a manner that 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~~increases 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 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~~are 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 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.

On ~~April 29, 2021,~~May 4, 2022, the FDA ~~announced plans to propose 2~~proposed two tobacco product standards related to combusted tobacco products: (1) a ban on menthol as a characterizing flavor in cigarettes; and (2) a ban on all characterizing flavors (including menthol) in cigars. On June 21, 2022, the FDA also issued a proposed product standard related to restricting the level of nicotine in traditional cigarettes. These product standards are required to go through the formal rulemaking process where we ~~would~~ have the opportunity to comment on the proposed rule with regard to ~~any~~the impact such standards would have on ~~any of~~ 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.

~~Table of Contents~~

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.

~~Direct Value Wholesale~~

In April 2021, Turning Point Brands Canada, a VIE for which the Company is considered the primary beneficiary, purchased 100% of the equity interests of Westhem Ventures LTD d/b/a Direct Value Wholesale (“DVW”) for $3.9 million, net of cash acquired, with $3.5 million paid in cash at closing and $0.5 million in accrued consideration to be paid during 2021. DVW is a Canadian distribution entity that operates in markets not primarily served by 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 provided a $3.7 million unsecured loan to Turning Point Brands Canada bearing interest at 8% per annum and maturing April 13, 2023. The unsecured loan is eliminated in the consolidation of Turning Point Brands Canada. As of March 31, 2022, 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:

~~Table of Contents~~

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

~~Turning Point Brands Canada~~

In July 2021, the Company invested 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 agreement with Turning Point Brands Canada for the sale of the Company’s products. As a result of the Company remaining the primary beneficiary, the increase in ownership interest resulted in a decrease in Non-controlling interest of $1.1 million and a decrease in Additional paid-in capital of $1.1 million

Note 4.3. 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~~up to ~~exceed~~ ~~90%~~100% of the purchase price. AtDuring the three months ended March 31, ~~2022 and December 31, 2021, the Company had 0 forward contracts outstanding.~~

~~Interest Rate Swaps~~

~~The Company’s policy is to manage interest rate risk relating to the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018,~~2023, the Company executed various ~~interest rate swap agreements~~foreign exchange contracts, which met hedge accounting requirements for ~~a notional amount~~the purchase of ~~$70~~€4.9 million ~~with an expiration of December 2022. The swap agreements fixed LIBOR at 2.755%~~. The ~~swap agreements met~~Company did not execute any foreign exchange contracts during three months ended March 31, 2022.

At March 31, 2023, the ~~hedge accounting requirements; thus, any change in~~Company had foreign currency contracts for the purchase of €15.3 million and sale of €10.4 million. The foreign currency contracts’ fair value ~~was recorded to other comprehensive income.~~ ~~The~~at March 31, 2023, resulted in an asset of $0.7 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities. At December 31, 2022, the Company ~~used the Shortcut Method to account~~had foreign currency contracts for the ~~swap agreements.~~purchase of €18.5 million and sale of €18.5 million. The ~~Shortcut Method assumes the hedge to be perfectly effective; thus, there is~~ no ~~ineffectiveness to be recorded~~foreign currency contracts’ fair value at December 31, 2022, resulted in ~~earnings. The Company terminated the interest rate swap agreement~~an asset of $1.2 million included in ~~conjunction with the prepayment~~Other current assets and a liability of ~~all outstanding amounts under the~~ ~~2018 First~~ ~~Lien Credit Facility (as defined below)~~$0.0 million included in ~~the~~ ~~first~~ ~~quarter of~~ ~~2021 with the early 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.~~Accrued liabilities.

Note 5.4. 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.

~~Table of Contents~~

Cash and Cash Equivalents

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

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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 below) bear interest at a rate of 5.625% per year. As of March 31, 2023, the fair value approximated $227.5 million, with a carrying value of $250 million. As of December 31, 2022, the fair value of the Senior Secured Notes approximated ~~their~~$226.4 million, with a carrying value of ~~$250~~$250 million due to the recency of the notes’ issuance, related to March 31, 2022. As of December 31, 2021, the fair value of the Senior Secured Notes approximated their carrying value of $250 million due to the recency of the notes’ issuance, related to December 31, 2021.due.

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 $~~160.9~~ 136.7 million,, with a carrying value of $~~172.5~~ 148.6 million as of March 31, ~~2022~~.2023. As of December 31, ~~2021~~,2022, the fair value of the Convertible Senior Notes without the conversion feature approximated $~~159.8~~ 139.2 million,, with a carrying value of $~~172.5 million~~162.5 .million.

See Note ~~11,~~10, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.

Note 6.5. Inventories

The components of inventories are as follows:

					March 31,		December 31,
	March 31, 2022		December 31, 2021		2023		2022
Raw materials and work in process	$	7,483	$	6,936	$	6,292	$	7,283
Leaf tobacco		47,733		35,900		40,131		43,468
Finished goods - Zig-Zag Products		28,928		25,663		43,640		42,279
Finished goods - Stoker’s Products		11,142		8,959		11,067		9,667
Finished goods - NewGen products		9,167		8,591
Finished goods - Creative Distribution Solutions						10,942		15,431
Other		1,405		1,558		1,666		1,787
Inventories	$	105,858	$	87,607	$	113,738	$	119,915

The inventory valuation allowance was ~~$5.4~~$4.8 million and ~~$7.7~~$4.5 million as of March 31, ~~2022,~~2023, and December 31, ~~2021,~~2022, respectively.

Note 7.6. Other Current Assets

Other current assets consist of:

					March 31,		December 31,
	March 31, 2022		December 31, 2021		2023		2022
Inventory deposits	$	9,245	$	12,091	$	5,280	$	6,395
Insurance deposit		3,000		3,000		3,000		3,000
Prepaid taxes						223		448
Other		13,418		11,655		11,458		13,116
Total	$	25,663	$	26,746	$	19,961	$	22,959

1716

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Note 8.7. Property, Plant, and Equipment

Property, plant, and equipment consists of:

							March 31,			December 31,
	March 31, 2022			December 31, 2021			2023			2022
Land	$	22		$	22		$	22		$	22
Buildings and improvements		3,096			3,096			3,096			3,096
Leasehold improvements		5,389			5,374			5,404			5,404
Machinery and equipment		22,322			19,591			28,082			25,832
Furniture and fixtures		9,380			9,402			9,317			9,264
Gross property, plant and equipment		40,209			37,485			45,921			43,618
Accumulated depreciation		(19,642	)		(18,835	)		(21,557	)		(20,830	)
Net property, plant and equipment	$	20,567		$	18,650		$	24,364		$	22,788

Note 9.8. Other Assets

Other assets consist of:

					March 31,		December 31,
	March 31, 2022		December 31, 2021		2023		2022
Equity investments	$	25,617	$	25,649	$	8,479	$	13,376
Debt security investment		8,000		8,000		7,820		7,820
Other		1,400		1,750		4,348		1,453
Total	$	35,017	$	35,399	$	20,647	$	22,649

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$8.0 million in Old Pal Holding Company LLC (“Old Pal”). In July 2022, the Company invested an additional $1.0 million in Old Pal. The Company invested in the form of a convertible note which includes additional follow-on investment rights. The accrued interest of $0.2 million from July 2021 to July 2022 was rolled into the convertible note in July 2022 resulting in a total investment of $9.2 million. 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 not paid to date are ~~payable~~receivable 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~~reaching certain sales thresholds. The weighted average interest rate on the convertible note was 3% 3.0% for the three months ended March 31, ~~2022.~~2023. Old Pal has the option to convert the note into shares once sales reach a certain threshold. The conditions required to allow Old Pal to convert the note were not met as of March 31, 2023. 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~~Quarterly, we perform a qualitative assessment to determine if the fair value of the ~~debt security approximated its carrying~~investment could be less than the amortized cost basis. The fourth quarter 2022 qualitative assessment determined that the fair value of ~~$8.0 million at March 31, 2022~~the investment could be less than the amortized cost basis and therefore the Company performed a quantitative assessment of the fair value of the investment. The fair value as of December 31, ~~2021, due~~2022 was determined to be $7.9 million based on a Monte Carlo simulation (Level 3). The Company determined that the ~~recency~~impairment was a result of credit related factors and, as such, recorded an allowance for credit losses of $1.4 million which is included in investment loss for the ~~debt security’s purchase, related to each such date.~~year ended December 31, 2022. The first quarter 2023 qualitative assessment determined no change in the fair value. The Company has recorded accrued interest receivable of $0.2 million ~~and $0.1 million~~ at March 31, ~~2022~~ ~~and December 31, 2021, respectively~~,2023, in other current assets on our Consolidated Balance Sheets.

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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. In the first quarter of 2023, based on Docklight’s financial results and other operating difficulties, and the decline in the revenue multiples for public companies comparable to Docklight, the Company deemed the investment in Docklight was impaired resulting in the fair value of the Company’s investment decreasing to $3.8 million resulting in a loss of $4.9 million which was recorded in Investment loss (gain) for the three months ended March 31, 2023. Fair value was determined using a valuation derived from relevant revenue multiples (Level 3). There could be additional impairment if future revenues continue to decline or if market conditions result in decreased revenue multiples which are used to estimate fair value.

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Note ~~10.~~9. Accrued Liabilities

Accrued liabilities consist of:

					March 31,		December 31,
	March 31, 2022		December 31, 2021		2023		2022
Accrued payroll and related items	$	4,768	$	6,974	$	4,437	$	7,685
Customer returns and allowances		6,257		6,497		5,883		7,291
Taxes payable		5,269		2,053		2,215		1,867
Lease liabilities		3,034		2,976		2,866		3,102
Accrued interest		2,724		7,318		2,683		7,277
Other		7,869		7,119		7,848		5,779
Total	$	29,921	$	32,937	$	25,932	$	33,001

Note ~~11.~~10. Notes Payable and Long-Term Debt

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

							March 31,			December 31,
	March 31, 2022			December 31, 2021			2023			2022
Senior Secured Notes	$	250,000		$	250,000		$	250,000		$	250,000
Convertible Senior Notes		172,500			172,500			148,600			162,500
Gross notes payable and long-term debt		422,500			422,500			398,600			412,500
Less deferred finance charges		(7,709	)		(8,328	)		(5,022	)		(5,743	)
Notes payable and long-term debt	$	414,791		$	414,172		$	393,578		$	406,757

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.

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The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at the redemption prices (expressed as a ~~price equal to 100%~~percentage of the principal amount ~~of the Notes redeemed~~to be redeemed) set forth below, 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.~~redeemed to (but not including) the applicable redemption date if redeemed during the period indicated below:

On or after February 15, 2023	102.813	%
On or after February 15, 2024	101.406	%
On or after February 15, 2025 and thereafter	100.000	%

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.

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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.~~2023.

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.

2021 Revolving Credit Facility

In connection with the Offering, the Company 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). The Company has 0not drawn any borrowings under the 2021 Revolving Credit Facility but does have letters of credit of approximately $~~3.6~~1.4 million outstanding under the ~~facility.~~facility as of March 31, 2023. 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.

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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)~~$5.0 million) 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.~~2023.

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.

~~2018 First Lien Credit Facility~~

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

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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.

In the first quarter of 2023, a wholly owned subsidiary of the Company purchased $13.9 million in aggregate principal amount of the Convertible Senior Notes on the open market for $13.0 million resulting in a $0.7 million gain on extinguishment of debt. In the fourth quarter of 2022 a wholly owned subsidiary of the Company purchased $10.0 million in aggregate principal amount of the Convertible Senior Notes on the open market for $9.0 million resulting in a $0.9 million gain on extinguishment of debt. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable securities law. As of March 31, 2023, $148.6 million aggregate principal remains outstanding and held by third parties.

The Convertible Senior Notes held by third parties are convertible into approximately ~~3,209,690~~3,007,462 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of ~~18.607~~18.6625 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately ~~$53.74~~$53.58 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, ~~2022.~~2023.

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 ~~$53.74~~$53.58 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.

~~Promissory Note~~

On ~~June 10, 2020, in connection with the acquisition~~Table of ~~certain Durfort assets, the Company issued the Promissory Note in the principal amount of $~~Contents~~10.0~~ ~~million, with an annual interest rate of~~ ~~7.5%, payable~~ ~~quarterly, with the~~ ~~first~~ ~~interest payment due~~ ~~September 10, 2020~~. The Company prepaid all outstanding amounts under and terminated the Promissory Note in the third quarter of 2021 in the amount of $9.6 million. The transaction resulted in a $0.4 million gain on extinguishment of debt.

~~Unsecured Loan~~

On ~~April 6, 2020, the~~ ~~2018 First~~ ~~Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of~~ ~~2020~~ ~~(“CARES”). On~~ ~~April 17, 2020, National Tobacco Company, L.P., a subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5~~ ~~million unsecured loan. The proceeds of the loan were received on~~ ~~April 27, 2020. The loan was scheduled to mature on~~ ~~April 17, 2022~~ ~~and had a~~ ~~1.00%~~ ~~interest 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 ~~12.~~11. Leases

The Company’s leases consist primarily of leased property for manufacturing, warehouse, ~~head~~corporate 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.

~~Table of Contents~~

The components of lease expense consisted of the following:

	Three Months Ended March 31,					Three Months Ended March 31,
	2022		2021			2023		2022
Operating lease cost
Cost of sales	$	227	$	225		$	128	$	227
Selling, general and administrative		690		752			521		399
Variable lease cost (1)		112		205			225		112
Short-term lease cost		14		11			6		14
Sublease income		0		(30	)
Total	$	1,043	$	1,163		$	880	$	752

(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.

March 31,
2022

December 31,
2021

Assets:
Right of use assets $ 14,405 $ 15,053
Total lease assets $ 14,405 $ 15,053

Liabilities:
Current lease liabilities (2)
$ 3,034 $ 2,976
Long-term lease liabilities 12,625 13,336
Total lease liabilities $ 15,659 $ 16,312

	Three Months Ended March 31,
	2023		2022
Financing lease cost
Selling, general and administrative	$	338	$	291
Total	$	338	$	291

	March 31,		December 31,
	2023		2022
Assets:
Right of use assets - Operating	$	10,477	$	10,967
Right of use assets - Financing	$	1,245	$	1,498
Total lease assets	$	11,722	$	12,465

Liabilities:
Current lease liabilities - Operating (2)	$	1,976	$	2,007
Current lease liabilities - Financing (2)	$	890	$	1,095
Long-term lease liabilities - Operating	$	9,762	$	10,243
Long-term lease liabilities - Financing		310		350
Total lease liabilities	$	12,938	$	13,695

(2)	Reported within accrued liabilities on the balance sheet

As of March 31,
2022 2021
Weighted-average remaining lease term - operating leases 6.5 years 7.1 years
Weighted-average discount rate - operating leases 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, 2022, maturities of lease liabilities consisted of the following:~~

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

2221

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Note ~~13.~~12. Income Taxes

The Company’s effective income tax rate for the three months ended March 31, 2023, was 25.2%. 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 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 ~~2018.~~2019.

Note ~~14.~~13. 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”), 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 100,052 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, ~~2022,~~2023, net of forfeitures, there were ~~87,367~~104,375 Restricted Stock Units (“RSUs”), ~~95,229~~81,176 options and ~~18,229~~(99,701) Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are ~~1,189,227~~1,304,202 shares available for grant under the 2021 Plan.

On April 28, 2016, the Board of Directors of the Company adopted the 2015 Plan, pursuant to which awards could have been granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provided 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 were 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 was scheduled to terminate on April 27, 2026. Upon adoption of the 2021 Plan, the 2015 Plan was terminated, and the Company determined no additional grants would be made under the 2015 Plan. However, all awards issued under the 2015 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. There are 0no shares available for grant under the 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 0no shares available for grant under the 2006 Plan.

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Stock option activity for the 2006, 2015 and 2021 Plans is summarized below:

	Stock Option Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value					Weighted		Weighted
Outstanding, December 31, 2020		711,060		$	19.58	$	6.42
								Stock			Average		Average
Granted		119,500			50.93		13.58
Exercised		(202,768	)		10.22		6.35
Forfeited		(7,957	)		33.22		9.63
								Option			Exercise		Grant Date
								Shares			Price		Fair Value
Outstanding, December 31, 2021		619,835			28.51		8.70		619,835		$	28.51	$	8.70

Granted		100,000			30.46		10.23		114,827			30.58		10.34
Exercised		(25,166	)		16.14		4.89		(40,331	)		12.49		4.08
Forfeited		(7,217	)		29.53		8.13		(11,117	)		32.60		9.35
Outstanding, March 31, 2022		687,452		$	29.23	$	9.07
Outstanding, December 31, 2022									683,214		$	29.74	$	9.24

Exercised									(24,955	)		14.30		4.48
Forfeited									(40,838	)		37.83		12.44
Outstanding, March 31, 2023									617,421		$	29.82	$	9.22

Under the 2006, 2015 and 2021 Plans, the total intrinsic value of options exercised during the three months ended March 31, 2023 and 2022, ~~and 2021,~~ was ~~$0.4~~$0.2 million, and ~~$3.3~~$0.4 million, respectively.

At March 31, ~~2022,~~2023, under the 2006 Plan, the exercise price for the ~~86,377~~69,163 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 ~~2.19~~1.32 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 with 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 0no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.

At March 31, ~~2022,~~2023, under the 2015 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,			May 17,			March 7,			March 20,			October 24,			March 18,			February 18,			May 3,
	February 10, 2017			May 17, 2017			March 7, 2018			March 20, 2019			October 24, 2019			March 18, 2020			February 18, 2021			May 3, 2021			2017			2017			2018			2019			2019			2020			2021			2021
Number of options granted		40,000			93,819			98,100			155,780			25,000			155,000			100,000			12,000			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
Options outstanding at March 31, 2023																										20,000			40,733			51,567			125,984			25,000			84,259			91,850			12,000
Number exercisable at March 31, 2023																										20,000			40,733			51,567			125,984			25,000			84,259			64,664			8,040
Exercise price	$	13.00		$	15.41		$	21.21		$	47.58		$	20.89		$	14.85		$	51.75		$	47.76		$	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			3.87			4.13			4.94			5.98			6.57			6.97			7.89			8.10
Risk free interest rate		1.89	%		1.76	%		2.65	%		2.34	%		1.58	%		0.79	%		0.56	%		0.84	%		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	%		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			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	%		-			-			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		$	3.98		$	4.60		$	6.37		$	15.63		$	6.27		$	4.41		$	13.77		$	13.06

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

							May 17,			March 14,			April 29,
	May 17, 2021			March 14, 2022			2021			2022			2022
Number of options granted		7,500			100,000			7,500			100,000			14,827
Options outstanding at March 31, 2022		7,500			100,000
Number exercisable at March 31, 2022		2,550			0
Options outstanding at March 31, 2023								7,500			74,538			14,827
Number exercisable at March 31, 2023								5,100			25,343			5,042
Exercise price	$	45.05		$	30.46		$	45.05		$	30.46		$	31.39
Remaining lives		9.13			9.96			8.13			8.96			9.09
Risk free interest rate		0.84	%		2.10	%		0.84	%		2.10	%		2.92	%
Expected volatility		31.50	%		35.33	%		31.50	%		35.33	%		35.33	%
Expected life		6.000			6.000			6.000			6.000			6.000
Dividend yield		0.63	%		1.01	%		0.63	%		1.01	%		0.98	%
Fair value at grant date	$	13.23		$	10.23		$	13.23		$	10.23		$	11.07

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~~income related to the options of approximately ~~$0.2~~$0.0 million and ~~$0.3~~expense of approximately $0.2 million for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. Total unrecognized compensation expense related to options at March 31, ~~2022,~~2023, is ~~$1.5~~$0.7 million, which will be expensed over ~~2.38~~1.6 years.

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, ~~2022~~2023, there are ~~477,547~~378,483 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of March 31, ~~2022~~2023.

															March 20,		March 18,		December 28,		February 18,		March 14,
	March 7, 2018		March 20, 2019		July 19, 2019		March 18, 2020		December 28, 2020		February 18, 2021		March 14, 2022		2019		2020		2020		2021		2022
Number of PRSUs granted		96,000		92,500		88,582		94,000		88,169		100,000		49,996		92,500		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
PRSUs outstanding at March 31, 2023																77,380		85,810		58,779		90,190		44,982
Fair value as of grant date	$	21.21	$	47.58	$	52.15	$	14.85	$	46.42	$	51.75	$	30.46	$	47.58	$	14.85	$	46.42	$	51.75	$	30.46
Remaining lives		0.75		1.75		0.75		2.75		1.75		3.75		4.75		0.75		1.75		0.75		2.75		3.75

The Company recorded compensation expense related to the PRSUs of approximately $~~0.8~~0.5 million and $~~1.2~~0.8 million in the consolidated statements of income for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31, ~~2022~~2023, is $~~6.2~~2.2 million which will be expensed over the service periods based on the probability of achieving the performance condition.

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The Company has granted ~~87,367~~89,696 RSUs which vest over one to five years. The following table outlines the RSUs granted and outstanding as of March 31, ~~2022.~~2023.

									March 14,		March 14,		April 29,		April 29,
	May 4, 2021		July 23, 2021		March 14, 2022		March 14, 2022		2022		2022		2022		2022
Number of RSUs granted		7,478		1,159		50,004		28,726		50,004		28,726		11,393		4,522
RSUs outstanding at March 31, 2022		7,478		1,159		50,004		28,726
RSUs outstanding at March 31, 2023										44,405		18,961		11,393		4,522
Fair value as of grant date	$	47.86	$	51.81	$	30.46	$	30.46	$	30.46	$	30.46	$	31.39	$	31.39
Remaining lives		0.09		0.31		4.75		2.75		3.75		1.75		0.07		3.75

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 $0.3 million and $0.2 million for the three months ended March 31, 2023 and 2022. Total unrecognized compensation expense related to RSUs at March 31, ~~2022,~~2023, is ~~$2.4~~$1.4 million, which will be expensed over ~~3.96~~3.32 years.

Note ~~15.~~14. 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 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 complaint purports to assert 2two derivative counts for breach of fiduciary duty on TPB’s behalf and against the TPB Board of Directors and certain SDI affiliates. The third count purports to assert a direct claim against TPB and its Board of Directors based 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~~attended a mediation in late November 2022 where a tentative settlement was reached which, if consummated as expected, will result in a benefit to the ~~complaint on August~~ Company.~~23,2021.~~ ~~While~~ The impact to the Company ~~believes it has good and valid defenses~~is not expected 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.~~

material.

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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 batteries and may be subject to claims in the future relating to other ~~NewGen~~Creative Distribution Solutions 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 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 2two franchisor subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from ~~time to time~~time-to-time responding parties to arbitration demands brought by franchisees.

We have reached an agreement to arbitrate a claim brought by a former franchisee. This matter 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 is claiming tortious interference and conversion. We believe the franchisor’s ultimate termination of the franchise agreement for multiple uncured material defaults by the franchisee was proper. We are party to another franchise arbitration with breach of contract and negligence allegations, among others. We believe we have good and valid substantive defenses against the claims and intend on vigorously defending our interests in ~~this matter.~~these matters.

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Note ~~16.~~15. 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,												2023						2022
	2022						2021										Per						Per
	Income		Shares		Per Share		Income		Shares		Per Share		Income		Shares		Share		Income		Shares		Share
Basic EPS:
Numerator
Net income attributable to Turning Point Brands, Inc.	$	10,998					$	11,783					$	7,597					$	10,998

Denominator
Weighted average				18,257,695	$	0.60				19,093,961	$	0.62				17,531,414	$	0.43				18,257,695	$	0.60

Diluted EPS:
Numerator
Net income attributable to Turning Point Brands, Inc.	$	10,998					$	11,783					$	7,597					$	10,998
Interest expense related to Convertible Senior Notes, net of tax		1,054						1,054						954						1,054
Diluted net income attributable to Turning Point Brands. Inc.	$	12,052					$	12,837					$	8,551					$	12,052

Denominator
Basic weighted average				18,257,695						19,093,961						17,531,414						18,257,695
Convertible Senior Notes				3,209,690						3,205,895						3,029,699						3,209,690
Stock options				282,125						365,211						108,039						282,125
				21,749,510	$	0.55				22,665,067	$	0.57				20,669,152	$	0.41				21,749,510	$	0.55

Note ~~17.~~16. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has 3three reportable segments: (1) Zig-Zag Products; (2) Stoker’s Products; and (3) ~~NewGen Products.~~Creative Distribution Solutions. The Zig-Zag Products segment markets and distributes (a) rolling papers, tubes, and related products; and (b) finished cigars and MYO cigar ~~wraps.~~wraps and (c) CLIPPER reusable lighters. 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~~Creative Distribution Solutions segment (a) markets and distributes 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~~U.S. and Canada while products in the ~~NewGen Products~~Creative Distribution Solutions segment are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the ~~United States.~~ U.S. Corporate unallocated includes the costs and assets of the Company not assigned to one of the 3three 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 three 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.

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The tables below present financial information about reported segments:

	Three Months Ended March 31,						Three Months Ended March 31,
	2022			2021			2023			2022

Net sales
Zig-Zag products	$	45,672		$	41,004		$	41,887		$	45,672
Stoker’s products		31,703			29,255			33,662			31,703
NewGen products		23,519			37,382
Total Zig-Zag and Stoker’s products							$	75,549		$	77,375
Creative Distribution Solutions								25,407			23,519
Total	$	100,894		$	107,641		$	100,956		$	100,894

Gross profit
Zig-Zag products	$	26,343		$	24,896		$	22,390		$	26,343
Stoker’s products		17,686			15,892			19,465			17,686
NewGen products		7,765			12,473
Total Zig-Zag and Stoker’s products							$	41,855		$	44,029
Creative Distribution Solutions								6,762			7,765
Total	$	51,794		$	53,261		$	48,617		$	51,794

Operating income (loss)
Zig-Zag products	$	18,737		$	19,437		$	13,641		$	18,737
Stoker’s products		13,506			12,255			14,563			13,506
NewGen products		678			2,006
Corporate unallocated ⁽¹⁾⁽²⁾		(13,692	)		(9,349	)		(10,623	)		(13,692	)
Total Zig-Zag and Stoker’s products							$	17,581		$	18,551
Creative Distribution Solutions								261			678
Total	$	19,229		$	24,349		$	17,842		$	19,229

Interest expense, net		5,196			4,486			4,010			5,196
Investment income		(78	)		(25	)		4,799			(78	)
Loss on extinguishment of debt		0			5,706
Gain on extinguishment of debt								(777	)		-
Income before income taxes	$	14,111		$	14,182		$	9,810		$	14,111

Capital expenditures
Zig-Zag products	$	2,323		$	0		$	973		$	2,323
Stoker’s products		464			840			1,462			464
NewGen products		0			2
Total Zig-Zag and Stoker’s products							$	2,435		$	2,787
Creative Distribution Solutions								-			-
Total	$	2,787		$	842		$	2,435		$	2,787

Depreciation and amortization
Zig-Zag products	$	92		$	114		$	267		$	92
Stoker’s products		767			635			706			767
NewGen products		475			516
Total Zig-Zag and Stoker’s products							$	973		$	859
Creative Distribution Solutions								574			475
Total	$	1,334		$	1,265		$	1,547		$	1,334

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

(2)	Includes costs related to PMTA of $0.1 million in 2023 and $1.1 million in ~~2022 and $0.3 million in 2021.~~2022.

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					March 31,		December 31,
	March 31, 2022		December 31, 2021		2023		2022
Assets
Zig-Zag products	$	227,989	$	227,554	$	207,653	$	225,893
Stoker’s products		172,400		142,334		153,647		151,241
NewGen products		61,529		72,746
Corporate unallocated ⁽¹⁾		156,785		158,926		165,643		155,348
Total Zig-Zag and Stoker’s products					$	526,943	$	532,482
Creative Distribution Solutions						32,983		39,624
Total	$	618,703	$	601,560	$	559,926	$	572,106

(1)	Includes assets not assigned to the 3three 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~~Creative Distribution Solutions sales are made business to business and business to consumer, both online and through our corporate retail stores. ~~NewGen~~Creative Distribution Solutions net sales are broken out by sales channel below.

					Creative Distribution Solutions Segment
	NewGen Segment				Three Months Ended
	Three Months Ended March 31,				March 31,
	2022		2021		2023		2022

Business to Business	$	19,124	$	27,257	$	22,493	$	19,124
Business to Consumer - Online		4,233		10,033		2,810		4,233
Other		162		92		104		162
Total	$	23,519	$	37,382	$	25,407	$	23,519

Net Sales—Domestic vs. Foreign

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

					Three Months Ended
	Three Months Ended March 31,				March 31,
	2022		2021		2023		2022
Domestic	$	93,766	$	100,127	$	93,860	$	93,766
Foreign		7,128		7,514		7,096		7,128
Total	$	100,894	$	107,641	$	100,956	$	100,894

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Note 17. Additional Information with Respect to Unrestricted Subsidiaries

Under the terms of the Indenture and Senior Secured Notes, the Company has designated its subsidiaries, South Beach Brands LLC, TPB Beast LLC and Intrepid Brands, LLC as an “Unrestricted Subsidiaries”. South Beach Brands LLC is a holding company under which our vape business TPB Beast LLC operating as Creative Distribution Solutions sits. The Company is required under the terms of the Indenture and the Senior Secured Notes to present additional information that reflects the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Company’s Unrestricted Subsidiaries as of and for the periods presented. This additional information is below.

Income Statement for the Three Months Ended March 31, 2023 (unaudited):

	Company and Restricted Subsidiaries			Unrestricted Subsidiaries		Consolidated
Net sales	$	75,549		$	25,407	$	100,956
Cost of sales		33,694			18,645		52,339
Gross profit		41,855			6,762		48,617
Selling, general, and administrative expenses		24,274			6,501		30,775
Operating income		17,581			261		17,842
Interest expense, net		4,010			-		4,010
Investment loss		4,799			-		4,799
Gain on extinguishment of debt		(777	)		-		(777	)
Income before income taxes		9,549			261		9,810
Income tax expense		2,402			66		2,468
Consolidated net income		7,147			195		7,342
Net loss attributable to non-controlling interest		(255	)		-		(255	)
Net income attributable to Turning Point Brands, Inc.	$	7,402		$	195	$	7,597

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Balance Sheet as of March 31, 2023 (unaudited):

ASSETS	Company and Restricted Subsidiaries		Unrestricted Subsidiaries		Eliminations			Consolidated
Current assets:
Cash	$	103,257	$	1,544		-		$	104,801
Accounts receivable, net		7,888		696		-			8,584
Inventories		103,166		10,572		-			113,738
Other current assets		16,210		3,751		-			19,961
Total current assets		230,521		16,563		-			247,084
Property, plant, and equipment, net		23,937		427		-			24,364
Deferred income taxes		8,069		-		-			8,069
Right of use assets		11,636		86		-			11,722
Deferred financing costs, net		256		-		-			256
Goodwill		136,253		-		-			136,253
Other intangible assets, net		66,944		15,877		-			82,821
Master Settlement Agreement (MSA) escrow deposits		28,710		-		-			28,710
Other assets		20,617		30		-			20,647
Investment in unrestricted subsidiaries		52,238		-		(52,238	)		-
Total assets	$	579,181	$	32,983		(52,238	)	$	559,926

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,258	$	1,132		-		$	10,390
Accrued liabilities		23,407		2,525		-			25,932
Other current liabilities		20		-		-			20
Total current liabilities		32,685		3,657		-			36,342
Notes payable and long-term debt		393,578		-		-			393,578
Lease liabilities		10,072		-		-			10,072
Total liabilities		436,335		3,657		-			439,992

Commitments and contingencies

Stockholders’ equity:
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries		141,394		29,326		(52,238	)		118,482
Non-controlling interest		1,452		-		-			1,452
Total stockholders’ equity		142,846		29,326		(52,238	)		119,934
Total liabilities and stockholders’ equity	$	579,181	$	32,983		(52,238	)	$	559,926

Income Statement for the Three Months Ended March 31, 2022 (unaudited):

	Company and Restricted Subsidiaries			Unrestricted Subsidiaries		Consolidated
Net sales	$	77,375		$	23,519	$	100,894
Cost of sales		33,346			15,754		49,100
Gross profit		44,029			7,765		51,794
Selling, general, and administrative expenses		25,478			7,087		32,565
Operating income		18,551			678		19,229
Interest expense, net		5,196			-		5,196
Investment loss		(78	)		-		(78	)
Income before income taxes		13,433			678		14,111
Income tax expense		3,180			160		3,340
Consolidated net income		10,253			518		10,771
Net loss attributable to non-controlling interest		(227	)		-		(227	)
Net income attributable to Turning Point Brands, Inc.	$	10,480		$	518	$	10,998

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Balance Sheet as of December 31, 2022:

ASSETS	Company and Restricted Subsidiaries		Unrestricted Subsidiaries		Eliminations			Consolidated
Current assets:
Cash	$	103,990	$	2,413		-		$	106,403
Accounts receivable, net		7,374		1,003		-			8,377
Inventories		104,883		15,032		-			119,915
Other current assets		18,828		4,131		-			22,959
Total current assets		235,075		22,579		-			257,654
Property, plant, and equipment, net		22,261		527		-			22,788
Deferred income taxes		8,443		-		-			8,443
Right of use assets		12,328		137		-			12,465
Deferred financing costs, net		282		-		-			282
Goodwill		136,253		-		-			136,253
Other intangible assets, net		67,241		16,351		-			83,592
Master Settlement Agreement (MSA) escrow deposits		27,980		-		-			27,980
Other assets		22,619		30		-			22,649
Investment in unrestricted subsidiaries		60,120		-		(60,120	)		-
Total assets	$	592,602	$	39,624		(60,120	)	$	572,106

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,628	$	727		-		$	8,355
Accrued liabilities		31,118		1,883		-			33,001
Other current liabilities		20		-		-			20
Total current liabilities		38,766		2,610		-			41,376
Notes payable and long-term debt		406,757		-		-			406,757
Lease liabilities		10,593		-		-			10,593
Total liabilities		456,116		2,610		-			458,726

Commitments and contingencies

Stockholders’ equity:
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries		134,751		37,014		(60,120	)		111,645
Non-controlling interest		1,735		-		-			1,735
Total stockholders’ equity		136,486		37,014		(60,120	)		113,380
Total liabilities and stockholders’ equity	$	592,602	$	39,624		(60,120	)	$	572,106

Note 18. Dividends and Share Repurchase

The most recent dividend of ~~$0.06~~$0.065 per common share was paid on April ~~8, 2022,~~7, 2023, to shareholders of record at the close of business on March ~~18, 2022.~~17, 2023.

The Company currently pays a quarterly cash dividend. 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~~On October 25, 2021, the ~~three~~ ~~months ended March~~ ~~31,2022,~~ ~~was~~ ~~310,224~~ ~~shares for a total cost of~~ ~~$10.6~~Board increased the approved share repurchase program by $30.7 million and by an ~~average price per share of~~ ~~$34.24.$45.8~~additional $24.6 million ~~remained~~ on February 24, 2022. $27.2 million remains available for share repurchases under the program at March 31,~~2022.~~ 2023.

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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~~Management’s Discussion and Analysis (“MD&A”) relates to the unaudited financial statements of Turning Point Brands, Inc., included elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to and should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in the Quarterly report on Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the 2022 Annual Report.

In this ~~discussion,~~MD&A, 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^®and our next generation products to fulfill evolving consumer preferences. Among other markets, we compete in the alternative smoking accessories and Other Tobacco Products (“OTP”) industries. The alternative smoking accessories market is a dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S. and Canada, and positively evolving consumer perception and acceptance in North America. The OTP industry, which consists of non-cigarette tobacco products, exhibited mid-single-digit consumer unit annualized growth over the ~~year~~three-year period ~~ending 2021~~ended 2022 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^® and CLIPPER^® in the Zig-Zag Products segment; Stoker’s^® along with Beech-Nut^® and Trophy^® in the Stoker’s ~~Products segment; and our distribution platforms (Vapor Beast~~^®~~, VaporFi~~^® ~~and~~ ~~Direct Vapor~~^®) ~~along with~~ ~~Solace~~^® ~~in the NewGen~~ Products segment. Our businesses generate solid cash flows which we use to invest in our business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We currently ship to approximately 800 distributors with an additional 200 secondary, indirect wholesalers in the U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories. As of December 31, ~~2021,~~2022, our products are available in approximately ~~195,000~~197,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated ~~215,000~~217,000 points of distribution. Our sales team targets widespread distribution to all traditional retail channels, including convenience stores, and we have a growing e-commerce business.

In the further quarter of 2022, we contributed our NewGen Products business to South Beach Holdings LLC doing business as Creative Distribution Solutions (“CDS”), a newly-formed wholly-owned subsidiary. CDS is separately operated and reports to it’s own Board of Directors. During the first quarter of 2023, the business was deemed an unrestricted subsidiary under the Senior Secured Notes and concurrently we renamed what we previously referred to as our NewGen Products segment as our Creative Distribution Solutions segment as we believe this name better aligns with the goals and strategies of the segment.

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Products

We operate in three segments: Zig-Zag Products, Stoker’s Products and ~~NewGen Products.~~Creative Distribution Solutions. 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.~~wraps and (iii) lighters and other accessories. In addition, we have a majority stake in Turning Point Brands Canada which markets and distributes cannabis accessories and tobacco products throughout Canada. 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~~Creative Distribution Solutions segment, we (i) market and distribute 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 and Direct Vapor B2C online platform.

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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. Our acquisition of VaporBeast in 2016 expanded our revenue streams as we began selling directly to non-traditional retail outlets. Our acquisition of IVG in 2018 enhanced our B2C revenue stream with the addition of the Vapor-Fi online platform. The acquisition of Solace 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%~~75% 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 and other conditions affecting purchasing power such as inflation;

~~Price sensitivity in our end-markets;~~Labor and production costs;

Cost and increasing regulation of promotional and advertising activities;

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

Increasing and unpredictable regulation of ~~NewGen~~Creative Distribution Solutions 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.

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~~Recent Developments~~

~~Non-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 requires 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 October 21, 2021, the United States Postal Service (“USPS”) published a Final Rule entitled “Treatment of E-Cigarettes in the Mail,” which followed its earlier publication of the Proposed Rule on February 19, 2021. This Final Rule was required as a result of the inclusion of Division FF, Title VI (Preventing Online Sales of E-Cigarettes to Children or “POSECA”) in the Further Consolidated Appropriations Act, 2021. POSECA, among other things, expanded the definition of “cigarettes” in the Jenkins Act and Prevent All Cigarette Trafficking (“PACT”) Act to expressly capture “electronic nicotine delivery systems,” i.e., ENDS. Consistent with the Proposed Rule, the Final Rule extends the existing prohibition on and exceptions to the mailing of “cigarettes” via USPS to ENDS products, other than the Consumer Testing and Public Health exceptions. Specifically, the Final Rule extends the following exceptions to the prohibition on mailing of ENDS products: the Business/Regulatory Purposes Exception, the Certain Individuals Exception, and the exception for intra-Alaska and intra-Hawaii shipments. We have received certain shipping exemptions from carrier services to carry the affected freight and have created a supplemental logistical network for those shipments not covered by the exemptions.

Critical Accounting Policies and Uses of Estimates

There have been no 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 ~~2021~~2022 Annual Report on Form 10-K.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that impact the Company.

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Results of Operations

Comparison of the Three Months Ended March 31, ~~2022,~~2023, to the Three Months Ended March 31, ~~2021~~2022

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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,
	2022			2021			% Change			2023			2022			% Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products	$	45,672		$	41,004			11.4	%	$	41,887		$	45,672			-8.3	%
Stoker’s products		31,703			29,255			8.4	%		33,662			31,703			6.2	%
NewGen products		23,519			37,382			-37.1	%
Total Zig-Zag and Stoker’s products											75,549			77,375			-2.4	%
Creative Distribution Solutions											25,407			23,519			8.0	%
Total net sales		100,894			107,641			-6.3	%		100,956			100,894			0.1	%
Cost of sales		49,100			54,380			-9.7	%		52,339			49,100			6.6	%
Gross profit
Zig-Zag products		26,343			24,896			5.8	%		22,390			26,343			-15.0	%
Stoker’s products		17,686			15,892			11.3	%		19,465			17,686			10.1	%
NewGen products		7,765			12,473			-37.7	%
Total Zig-Zag and Stoker’s products											41,855			44,029			-4.9	%
Creative Distribution Solutions											6,762			7,765			-12.9	%
Total gross profit		51,794			53,261			-2.8	%		48,617			51,794			-6.1	%

Selling, general, and administrative expenses		32,565			28,912			12.6	%		30,775			32,565			-5.5	%
Operating income		19,229			24,349			-21.0	%		17,842			19,229			-7.2	%
Interest expense, net		5,196			4,486			15.8	%		4,010			5,196			-22.8	%
Investment income		(78	)		(25	)		212.0	%
Loss on extinguishment of debt		-			5,706			-100.0	%
Investment loss (gain)											4,799			(78	)		-6252.6	%
Gain on extinguishment of debt											(777	)		-		NM
Income before income taxes		14,111			14,182			-0.5	%		9,810			14,111			-30.5	%
Income tax expense		3,340			2,654			25.8	%		2,468			3,340			-26.1	%
Consolidated net income		10,771			11,528			-6.6	%		7,342			10,771			-31.8	%
Net loss attributable to non-controlling interest		(227	)		(255	)		-11.0	%		(255	)		(227	)		12.3	%
Net income attributable to Turning Point Brands, Inc.	$	10,998		$	11,783			-6.7	%	$	7,597		$	10,998			-30.9	%

Net Sales: For the three months ended March 31, ~~2022,~~2023, consolidated net sales ~~decreased~~increased to ~~$100.9~~$101.0 million from ~~$107.6~~$100.9 million for the three months ended March 31, ~~2021, a decrease~~2022, an increase of ~~$6.7~~$0.1 million or ~~6.3%~~0.1%. ~~The decrease in net sales was driven by decreased sales volume in the NewGen Products segment.~~

For the three months ended March 31, ~~2022,~~2023, net sales in the Zig-Zag Products segment ~~increased~~decreased to ~~$45.7~~$41.9 million from ~~$41.0~~$45.7 million for the three months ended March 31, ~~2021, an increase~~2022, a decrease of ~~$4.7~~$3.8 million or ~~11.4%~~8.3%. For the three months ended March 31, ~~2022,~~2023, volume ~~increased 7.1%~~decreased 8.6% and price/mix increased ~~4.3%~~0.3%. The ~~increase~~decrease in net sales was driven by ~~double-digit~~ growth in our Canadian and other smoking accessories businesses offset by anticipated declines in the U.S. rolling papers and ~~our E-Commerce business.~~wraps businesses which were impacted by reduction of trade inventory during the quarter.

For the three months ended March 31, ~~2022,~~2023, net sales in the Stoker’s Products segment increased to ~~$31.7~~$33.7 million from ~~$29.3~~$31.7 million for the three months ended March 31, ~~2021,~~2022, an increase of ~~$2.4~~$2.0 million or ~~8.4%~~6.2%. For the three months ended March 31, ~~2022,~~2023, volume increased 0.3% and price/mix increased ~~8.1%~~5.9%. The increase in net sales was driven by ~~the continuing double-digit~~high single-digit growth of Stoker’s^® ~~MST.~~MST and low single-digit growth of loose-leaf chewing tobacco.

For the three months ended March 31, ~~2022,~~2023, net sales in the ~~NewGen products~~Creative Distribution Solutions segment ~~decreased~~increased to ~~$23.5~~$25.4 million from ~~$37.4~~$23.5 million for the three months ended March 31, ~~2021, a decrease~~2022, an increase of ~~$13.9~~$1.9 million or ~~37.1%~~8.0%. The ~~decrease~~increase in net sales was primarily the result of ~~declines~~improved volumes in the vape distribution businesses.

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Gross Profit: For the three months ended March 31, ~~2022,~~2023, consolidated gross profit decreased to ~~$51.8~~$48.6 million from ~~$53.3~~$51.8 million for the three months ended March 31, ~~2021,~~2022, a decrease of ~~$1.5~~$3.2 million or ~~2.8%~~6.1%. Gross profit as a percentage of ~~revenue increased~~net sales decreased to 48.2% for the three months ended March 31, 2023, compared to 51.3% for the three months ended March 31, 2022 ~~compared to 49.5% for the three months ended March 31, 2021~~ driven by increased margin in the Stoker’s Products segment offset by decreased margin in the Zig-Zag Products and ~~mix~~Creative Distribution Solutions segments as ~~the NewGen Products segment generates lower margins.~~a result of mix.

For the three months ended March 31, ~~2022,~~2023, gross profit in the Zig-Zag Products segment ~~increased~~decreased to ~~$26.3~~$22.4 million from ~~$24.9~~$26.3 million for the three months ended March 31, ~~2021, an increase~~2022, a decrease of ~~$1.4~~$4.0 million or ~~5.8%~~15.0%. Gross profit as a percentage of net sales decreased to 53.5% of net sales for the three months ended March 31, 2023, from 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 product mix including the ~~consolidation~~decline in net sales of ~~DVW in Turning Point Brands Canada in the current year period~~higher margin U.S. rolling paper and wraps products and contribution of CLIPPER lighters which operates at lower ~~margins than our traditional business.~~gross profit margins.

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For the three months ended March 31, ~~2022,~~2023, gross profit in the Stoker’s Products segment increased to ~~$17.7~~$19.5 million from ~~$15.9~~$17.7 million for the three months ended March 31, 2022, an increase of $1.8 million or ~~11.3%~~10.1%. Gross profit as a percentage of net sales increased to 57.8% of net sales for the three months ended March 31, 2023, from 55.8% of net sales for the three months ended March 31, 2022, ~~from 54.3% of net sales for the three months ended March 31, 2021,~~ primarily as a result of the strong incremental margin contribution of MST.

For the three months ended March 31, ~~2022,~~2023, gross profit in the ~~NewGen products~~Creative Distribution Solutions segment decreased to ~~$7.8~~$6.8 million from ~~$12.5~~$7.8 million for the three months ended March 31, ~~2021,~~2022, a decrease of ~~$4.7~~$1.0 million or ~~37.7%~~12.9%. Gross profit as a percentage of net sales decreased to 26.6% of net sales for the three months ended March 31, 2023, from 33.0% of net sales for the three months ended March 31, 2022, ~~from 33.4%~~primarily as a result of ~~net sales for the three months ended March 31, 2021.~~product mix.

Selling, General, and Administrative Expenses: For the three months ended March 31, ~~2022,~~2023, selling, general, and administrative expenses ~~increased~~decreased to ~~$32.6~~$30.8 million from ~~$28.9~~$32.6 million for the three months ended March 31, ~~2021, an increase~~2022, a decrease of ~~$3.7~~$1.8 million or ~~12.6%~~5.5%. Selling, general and administrative expenses in the three months ended March 31, 2023, included $0.7 million of stock options, restricted stock and incentives expense, $0.2 million of expense related to PMTA and $0.1 million of expense related to the new ERP and CRM systems. Selling, general and administrative expenses in the three months ended March 31, 2022, included $1.2 million of stock ~~options,~~option, restricted stock and incentives expense, $0.4 million of transaction ~~expense,~~costs, $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 option, restricted stock and incentives expense, $0.6 million of transaction costs and $0.3 million of expense related to PMTA.systems

Interest Expense, net: For the three months ended March 31, ~~2022,~~2023, interest expense, net ~~increased~~decreased to ~~$5.2~~$4.0 million, from ~~$4.5~~$5.2 million for the three months ended March 31, ~~2021~~2022 as a result of the ~~increase~~repurchase of $23.9 million of Convertible Senior Notes in the ~~Company’s outstanding debt in February 2021.~~fourth quarter of 2022 and the first quarter of 2023 and increased interest income on cash as a result of rising interest rates.

Investment ~~Income:~~Loss (Gain): For the three months ended March 31, ~~2022,~~2023, investment ~~income increased~~loss of $4.8 million compared to investment gain of $0.1 ~~million, from $0.0~~ million for the three months ended March 31, ~~2021.~~2022. The change is a result of the impairment charge recognized on our investment in Docklight for $4.9 million in the first quarter 2023.

~~Loss~~Gain on Extinguishment of Debt: There was a gain on extinguishment of debt of $0.8 million for the three months ended March 31, 2023 as a result of repurchasing $13.9 million of Convertible Senior Notes compared to no ~~loss~~gain 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.~~2022.

Income Tax Expense: Our income tax expense of ~~$3.3~~$2.5 million was ~~23.7%~~25.2% of income before income taxes for the three months ended March 31, ~~2022 and included a discrete tax benefit of $0.4 million~~ ~~relating to stock option exercises~~.2023. Our effective income tax rate was ~~18.7%~~23.7% for the three months ended March 31, ~~2021~~2022 and included a discrete tax benefit ~~$3.3~~$0.4 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest: Net loss attributable to non-controlling interest was $0.3 million for the three months ended March 31, 2023 compared to $0.2 million for the three months ended March 31, ~~2022 compared to $0.3 million for the three months ended March 31, 2021.~~2022.

Net Income Attributable to Turning Point Brands, Inc.: Due to the factors described above, net income attributable to Turning Point Brands, Inc. for the three months ended March 31, 2023 and 2022, ~~and 2021,~~ was ~~$11.0~~$7.6 million and ~~$11.8~~$11.0 million, respectively.

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EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance. In addition, our debt instruments contain covenants which use Adjusted EBITDA calculations.

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We define “EBITDA” as net income before interest expense, ~~loss~~gain (loss) on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define “Adjusted EBITDA” as net income before interest expense, ~~loss~~gain (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				Three Months Ended
(in thousands)	March 31,				March 31,
	2022		2021		2023			2022
Net income attributable to Turning Point Brands, Inc.	$	10,998	$	11,783	$	7,597		$	10,998
Add:
Interest expense, net		5,196		4,486		4,010			5,196
Loss on extinguishment of debt		-		5,706
Gain on extinguishment of debt						(777	)		-
Income tax expense		3,340		2,654		2,468			3,340
Depreciation expense		871		788		776			871
Amortization expense		463		477		771			463
EBITDA	$	20,868	$	25,894	$	14,845		$	20,868
Components of Adjusted EBITDA
Corporate restructuring (a)		1,332		-		-			1,332
ERP/CRM (b)		330		-		138			330
Stock options, restricted stock, and incentives expense (c)		1,159		1,498		743			1,159
Transactional expenses (d)		425		607		4			425
FDA PMTA (e)		1,139		-		158			1,139
Non-cash asset impairment (f)						4,897			-
Adjusted EBITDA	$	25,253	$	27,999	$	20,785		$	25,253

(a)	Represents costs associated with corporate restructuring, including severance.

(b)	Represents ~~costs associated~~cost assosicated with scoping and mobilization of new ERP and CRM ~~systems.~~systems and cost of duplicative ERP licenses.

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

(d)	Represents the fees incurred for transaction expenses.

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

(f)	Represents impairment of investment assets.

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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, ~~2022,~~2023, we had ~~$126.0~~$104.8 million of cash on hand and have ~~$21.4~~$23.6 million of availability under the 2021 Revolving Credit Facility.

Our working capital, which we define as current assets less cash and current liabilities, ~~increased $1.0~~decreased $3.9 million to ~~$81.5~~$105.9 million at March 31, ~~2022,~~2023, compared with ~~$80.5~~$109.9 million at December 31, ~~2021.~~2022.

	As of
(in thousands)	March 31, 2023		December 31, 2022

Current assets	$	142,283	$	151,251
Current liabilities		36,342		41,376
Working capital	$	105,941	$	109,875

As of

(in thousands)

March 31,
2022

December 31,
2021

Current assets $ 140,971 $ 120,849
Current liabilities 59,423 40,336
Working capital $ 81,548 $ 80,513

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Cash Flows from Operating Activities

For the three months ended March 31, ~~2022,~~2023, net cash provided by operating activities was ~~$13.0~~$15.4 million compared to net cash provided by operating activities of ~~$24.2~~$13.0 million for the three months ended March 31, ~~2021, a decrease~~2022, an increase of ~~$11.2~~$2.3 million, primarily due to ~~lower net income 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, ~~2022,~~2023, net cash used in investing activities was ~~$11.3~~$2.4 million compared to net cash used in investing activities of ~~$15.8~~$11.3 million for the three months ended March 31, ~~2021,~~2022, a decrease of ~~$4.5~~$8.8 million, primarily due to the ~~lower~~a decrease in purchases of investments in our MSA escrow ~~account partially offset by increased capital expenditures.~~account.

Cash Flows from Financing Activities

For the three months ended March 31, ~~2022,~~2023, net cash used in financing activities was ~~$12.5~~$14.6 million compared to net cash ~~provided by~~used in financing activities of ~~$102.1~~$12.5 million for the three months ended March 31, ~~2021, an~~2022, a decrease in cash flow of ~~$114.6~~$2.0 million, primarily due to the ~~increase~~decrease in repurchases of common stock during ~~2022 compared to net proceeds received from the Senior Secured Notes partially~~2023 offset by ~~the repayment in full~~repurchases of ~~the 2018 First Lien Term Loan in the first quarter of 2021.~~Convertible Senior Notes.

Dividends and Share Repurchase

The most recent dividend of ~~$0.06~~$0.065 per common share was paid on April ~~8, 2022,~~7, 2023, to shareholders of record at the close of business on March ~~18, 2022.~~17, 2023.

On February 25, 2020, our Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The program is subject to the ongoing discretion of the Board. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 ~~million. On~~million and by an additional $24.6 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, 2022, was 310,224 shares for a total cost of $10.6 million and an average price per share of $34.24. $45.82022. $27.2 million remains available for share repurchases under the program at March 31, ~~2022.~~2023.

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Long-Term Debt

As of March 31, ~~2022,~~2023, 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, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Senior Secured Notes	$	250,000		$	250,000		$	250,000		$	250,000
Convertible Senior Notes		172,500			172,500			148,600			162,500
Gross notes payable and long-term debt		422,500			422,500			398,600			412,500
Less deferred finance charges		(7,709	)		(8,328	)		(5,022	)		(5,743	)
Notes payable and long-term debt	$	414,791		$	414,172		$	393,578		$	406,757

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.

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The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at the redemption prices (expressed as a ~~price equal to 100%~~percentage of the principal amount ~~of the Notes redeemed~~to be redeemed) set forth below, 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.~~redeemed to (but not including) the applicable redemption date if redeemed during the period indicated below:

On or after February 15, 2023	102.813%
On or after February 15, 2024	101.406%
On or after February 15, 2025 and thereafter	100.000%

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.~~
2023.

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.

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2021 Revolving Credit Facility

In connection with the Offering, we also entered into a new $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~~$1.4 million outstanding under the ~~facility.~~facility as of March 31, 2023. 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 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.~~
2023.

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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.

~~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.

In the first quarter of 2023, a wholly owned subsidiary purchased $13.9 million in aggregate principal amount of our Convertible Senior Notes on the open market for $13.0 million resulting in a $0.7 million gain on extinguishment of debt. In the fourth quarter of 2022 a wholly owned subsidiary purchased $10.0 million in aggregate principal amount of our Convertible Senior Notes on the open market for $9.0 million resulting in a $0.9 million gain on extinguishment of debt. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable securities law. As of March 31, 2023, $148.6 million aggregate principal remains outstanding and held by third parties.

The Convertible Senior Notes held by third parties are convertible into approximately ~~3,209,690~~3,007,462 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of ~~18.607~~18.6625 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately ~~$53.74~~$53.58 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, ~~2022.~~2023.

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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 ~~$53.74~~$53.58 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 transaction resulted in a $0.4 million gain on extinguishment of debt.

~~Unsecured Loan~~

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 issued pursuant to the CARES Act. The proceeds of the loan were received on April 27, 2020. The loan was scheduled to mature on April 17, 2022 and had 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.

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Off-balance Sheet Arrangements

During the three months ended March 31, ~~2022~~,2023, we executed various foreign exchange contracts for the ~~Company did not execute any forward contracts. We~~purchase of €4.9 million with maturity dates ranging from August 2023 to October 2023. At March 31, 2023, we had ~~no forward~~foreign currency contracts for the purchase of €15.3 million and sale of €10.4 million. The fair value of the foreign currency contracts were based on quoted market prices and resulted in an asset of $0.7 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities at March 31, ~~2022.~~ 2023. During ~~2021,~~2022, we ~~did not execute any forward contracts. We~~executed various foreign currency contracts for the purchase of €28.9 million and sale of €28.9 million. At December 31, 2022, we had ~~no forward~~foreign currency contracts for the purchase of €18.5 million and sale of €18.5 million. The fair value of the foreign currency contracts resulted in an asset of $1.2 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities at December 31, ~~2021. The Company had no interest rate swap contracts at March 31,~~ 2022.The Company terminated its 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

Inflation in general and the recent rapid increases in gas prices have had a substantial negative effect on the purchasing power of consumers. While historically, we have been able to increase prices at a rate equal to or greater than that of inflation, that would be difficult to do in the 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 ~~2021~~2022 Annual Report on Form 10-K, during the period. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our ~~2021~~2022 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 ~~2021~~2022 Annual Report on Form 10-K, during the three months ended March 31, ~~2022~~2023. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our ~~2021~~2022 Annual Report on Form 10-K filed with the SEC.

Interest Rate Sensitivity

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

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Item 4. Controls and Procedures

We have carried out an evaluation under the supervision, and with the participation of, our management including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and Chief Accounting Officer (“CAO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of March 31, ~~2022~~2023. Based upon the evaluation, our CEO, CFO, and CAO concluded our disclosure controls and procedures are not effective as of such date solely due to a material ~~weakness~~weaknesses in internal controls over financial reporting that ~~was~~were disclosed in our Annual Report on Form 10-K for the 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, 2022 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.2022.

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, during our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, we ~~began implementing a remediation plan~~concluded that our internal control over financial reporting was not effective solely due to the existence of the following material weaknesses: we did not design and maintain effective internal controls related to our information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology (“IT”) systems that support the Company’s financial reporting processes. Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

We also did not appropriately design and operate controls associated with the risk assessment component of the internal control framework, specifically as it relates to identifying risks around segregation of duties within the financial reporting function, and the identification of all risks relating to the financial statements and controls that would address such risks. This impacts business process controls (automated and manual) throughout financial reporting and the ~~material weakness mentioned above.~~ business transaction cycles.

The material ~~weakness~~weaknesses did not result in any identified misstatements to the financial statements, and there were no changes to previously released financial results. The material weaknesses 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~~

There have been no changes in the ~~remediation of this material weakness will be completed by the end of~~Company’s internal control over financial reporting during the fiscal ~~year 2022.~~quarter ended March 31, 2023 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal proceedings, please see Contingencies in Note 1514 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 ~~2021~~2022 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 ~~2021~~2022 Annual Report on Form 10-K. There have been no material changes to the Risk Factors set forth in the ~~2021~~2022 Annual Report on Form 10-K.

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

On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. 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~~$50.0 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~~$50.0 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, ~~2022~~2023 in connection with the repurchase program described above:

Period	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		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		172,624	$	37.20		172,624	$	25,410,384		3,125	$	21.63		-	$	27,197,886
February 1 to February 28		28,855	$	33.81		5,572	$	49,814,062		35,738	$	22.99		-	$	27,197,886
March 1 to March 31		142,832	$	30.56		132,028	$	45,800,411		-	$	-		-	$	27,197,886
Total		344,311				310,224				38,863				-

⁽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~~3,125 shares in ~~February~~January and ~~10,804~~35,738 shares in ~~March)~~February). 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.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit No.	Description

31.1	Rule 13a-14(a)/15d-14(a) Certification of ~~Yavor Efremov.~~Graham Purdy.*

31.2	Rule 13a-14(a)/15d-14(a) Certification of Luis Reformina.*

31.3	Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*

32.1	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 March 31, ~~2022,~~2023, filed on ~~April 27, 2022,~~May 4, 2023, 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.*

104	Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101).*

* Filed or furnished herewith

4443

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Signatures

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

	TURNING POINT BRANDS, INC.

	By: /s/ ~~Yavor Efremov~~Graham Purdy
	Name: ~~Yavor Efremov~~Graham Purdy
	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: ~~April 27, 2022~~May 4, 2023

4544

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)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	TPB	New York Stock Exchange

Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

	Three Months Ended March 31,						Three Months Ended March 31,
	2022			2021			2023			2022
Consolidated net income	$	10,771		$	11,528		$	7,342		$	10,771

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
Unrealized gain (loss) on MSA investments, net of tax of $176 in 2023 and $357 in 2022								553			(1,126	)
Foreign currency translation, net of tax of $0 in 2023 and 2022								(78	)		(7	)
Unrealized loss on derivative instruments, net of tax of $109 in 2023 and $0 in 2022								(344	)		-
		(1,133	)		2,314			131			(1,133	)
Consolidated comprehensive income		9,638			13,842			7,473			9,638
Comprehensive loss attributable to non-controlling interest		(229	)		(96	)		(255	)		(229	)
Comprehensive income attributable to Turning Point Brands, Inc.	$	9,867		$	13,938		$	7,728		$	9,867

			Page No.
PART I—FINANCIAL INFORMATION

	ITEM 1	Financial Statements (Unaudited)

		Consolidated Balance Sheets as of March 31, ~~2022,~~2023, and December 31, ~~2021~~2022	5

		Consolidated Statements of Income for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022	6

		Consolidated Statements of Comprehensive Income for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022	7

		Consolidated Statements of Cash Flows for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022	8

		Consolidated Statements of Changes in ~~Stockholder’s~~Stockholders’ Equity for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022	9

		Notes to Consolidated Financial Statements	10

	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3132

	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	40

	ITEM 4	Controls and Procedures	41

PART II—OTHER INFORMATION

	ITEM 1	Legal Proceedings	42

	ITEM 1A	Risk Factors	42

	ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	42

	ITEM 3	Defaults Upon Senior Securities	42

	ITEM 4	Mine Safety Disclosures	4342

	ITEM 5	Other Information	4342

	ITEM 6	Exhibits	4443

	Signatures		4544

							(unaudited)
							March 31,			December 31,
ASSETS	(unaudited) March 31, 2022			December 31, 2021			2023			2022
Current assets:
Cash	$	126,045		$	128,320		$	104,801		$	106,403
Accounts receivable, net of allowances of $177 in 2022 and $262 in 2021		9,450			6,496
Accounts receivable, net of allowances of $101 in 2023 and $114 in 2022								8,584			8,377
Inventories		105,858			87,607			113,738			119,915
Other current assets		25,663			26,746			19,961			22,959
Total current assets		267,016			249,169			247,084			257,654
Property, plant, and equipment, net		20,567			18,650			24,364			22,788
Deferred income taxes		1,754			1,363			8,069			8,443
Right of use assets		14,405			15,053			11,722			12,465
Deferred financing costs, net		362			388			256			282
Goodwill		162,323			162,333			136,253			136,253
Other intangible assets, net		87,022			87,485	��		82,821			83,592
Master Settlement Agreement (MSA) escrow deposits		30,237			31,720			28,710			27,980
Other assets		35,017			35,399			20,647			22,649
Total assets	$	618,703		$	601,560		$	559,926		$	572,106

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	29,464		$	7,361		$	10,390		$	8,355
Accrued liabilities		29,921			32,937			25,932			33,001
Other current liabilities		38			38			20			20
Total current liabilities		59,423			40,336			36,342			41,376
Notes payable and long-term debt		414,791			414,172			393,578			406,757
Lease liabilities		12,625			13,336			10,072			10,593
Total liabilities		486,839			467,844			439,992			458,726

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, voting, $0.01 par value; authorized shares, 190,000,000; 19,901,989 issued shares and 17,585,529 outstanding shares at March 31, 2023, and 19,801,623 issued shares and 17,485,163 outstanding shares at December 31, 2022								199			198
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			113,477			113,242
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	)
Cost of repurchased common stock (2,316,460 shares at March 31, 2023 and December 31, 2022)								(78,093	)		(78,093	)
Accumulated other comprehensive loss		(1,326	)		(195	)		(2,234	)		(2,393	)
Accumulated earnings		81,327			71,460			85,133			78,691
Non-controlling interest		2,083			2,312			1,452			1,735
Total stockholders’ equity		131,864			133,716			119,934			113,380
Total liabilities and stockholders’ equity	$	618,703		$	601,560		$	559,926		$	572,106

																																			Accumulated
																											Common		Additional			Cost of			Other						Non-
																								Voting			Stock,		Paid-In			Repurchased			Comprehensive			Accumulated			Controlling
																								Shares			Voting		Capital			Common Stock			Income (Loss)			Earnings			Interest			Total

Beginning balance January 1, 2023																									17,485,163		$	198	$	113,242		$	(78,093	)	$	(2,393	)	$	78,691		$	1,735		$	113,380

Unrealized loss on MSA investments, net of tax of $176																									-			-		-			-			553			-			-			553
Unrealized loss on derivative instruments, net of tax of $109																									-			-		-			-			(344	)		-			-			(344	)
Foreign currency translation, net of tax of $0																									-			-		-			-			(50	)		-			(28	)		(78	)
Stock compensation expense																									-			-		743			-			-			-			-			743
Exercise of options																									24,955			-		357			-			-			-			-			357
Performance restricted stock units issuance																									114,274			1		(1	)		-			-			-			-			-
Performance restricted stock units redeemed																									(38,863	)		-		(889	)		-			-			-			-			(889	)
Cost of repurchased common stock																									-			-		-			-			-			-			-			-
Settlement of call options, net of tax of $ 8																									-			-		25			-			-			-			-			25
Dividends																									-			-		-			-			-			(1,155	)		-			(1,155	)
Net income																									-			-		-			-			-			7,597			(255	)		7,342
Ending balance March 31, 2023																									17,585,529		$	199	$	113,477		$	(78,093	)	$	(2,234	)	$	85,133		$	1,452		$	119,934
	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			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	)		-			-		-			-			(1,126	)		-			-			(1,126	)
Foreign currency translation, net of tax of $0		-			0		0			0			(5	)		0			(2	)		(7	)		-			-		-			-			(5	)		-			(2	)		(7	)
Stock compensation expense		-			0		1,159			0			0			0			0			1,159			-			-		1,159			-			-			-			-			1,159
Exercise of options		25,166			0		245			0			0			0			0			245			25,166			-		245			-			-			-			-			245
Performance restricted stock units issuance		103,843			1		(1	)		0			0			0			0			0			103,843			1		(1	)		-			-			-			-			-
Performance restricted stock units redeemed		(34,087	)		0		(1,141	)		0			0			0			0			(1,141	)		(34,087	)		-		(1,141	)		-			-			-			-			(1,141	)
Cost of repurchased common stock		(310,224	)		0		0			(10,622	)		0			0			0			(10,622	)		(310,224	)		-		-			(10,622	)		-			-			-			(10,622	)
Dividends		-			0		0			0			0			(1,131	)		0			(1,131	)		-			-		-			-			-			(1,131	)		-			(1,131	)
Net income		-			0		0			0			0			10,998			(227	)		10,771			-			-		-			-			-			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			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

	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

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

	As of March 31,
	2022			2021
Weighted-average remaining lease term - operating leases	6.5 years			7.1 years
Weighted-average discount rate - operating leases		4.88	%		4.93	%

	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