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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20222023

or

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

Commission file number: 001-37763

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

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

5201 Interchange Way, Louisville, KY 40229
(Address of principal executive offices) (Zip Code)

(502) 778-4421
(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report: not applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueTPBNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No 

At October 21, 2022,July 26, 2023, there were 17,563,97817,595,579 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.



TURNING POINT BRANDS, INC.
TABLE OF CONTENTS

  Page No.
PART I—FINANCIAL INFORMATION 
  
 ITEM 1Financial Statements (Unaudited) 
    
  5
6
    
  7
    
  8
    
  9
Consolidated Statements of Comprehensive Income for the six months ended June 30, 2023 and 2022
9
910
11
    
  10
11
    
  12
    
 ITEM 23735
    
 ITEM 34946
    
 ITEM 449
46
    
PART II—OTHER INFORMATION 
  
 ITEM 15047
    
 ITEM 1A5047
    
 ITEM 250
48
    
 ITEM 350
48
    
 ITEM 450
48
    
 ITEM 550
48
    
 ITEM 65149
    
 5250

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may generally be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” and “will” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that may or may not occur in the future. As a result, actual events may differ materially from those expressed in, or suggested by, the forward-looking statements. Any forward-looking statement made by Turning Point Brands, Inc. (“TPB”), in this Quarterly Report on Form 10-Q speaks only as of the date hereof. New risks and uncertainties arisecome up from time to time, and it is impossible for TPB to predict these events or how they may affect it. TPB has no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required by federal securities laws. Factors that could cause these differences include, but are not limited to:


declining sales of tobacco products, and expected continuing decline of sales, in the tobacco industry overall;

our dependence on a small number of third-party suppliers and producers;

the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption, as well as other supply chain concerns, including delays in product shipments and increases in freight cost;

the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;

failure to maintain consumer brand recognition and loyalty of our customers;

our reliance on relationships with several large retailers and national chains for distribution of our products;

intense competition and our ability to compete effectively;

competition from illicit sources and the damage caused by illicit products to brand equity;

contamination of our tobacco supply or products;

uncertainty and continued evolution of the markets for our NewGen and cigarCreative Distribution Solutions products;

complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;

substantial and increasing U.S. regulation;

regulation or marketing denials of our products by the FDA,U.S. Food and Drug Administration, which has broad regulatory powers;

many of our products contain nicotine, which is considered to be a highly addictive substance;

requirement to maintain compliance with master settlement agreement escrow agreement;account;

possible significant increases in federal, state and local municipal tobacco- and vapor-related taxes;

our products are subject to developing and unpredictable regulation, such as court actions that impact obligations;

increase in state and local regulation of our NewGenCreative Distribution Solutions products has been proposed or enacted;

increase in tax of our NewGenCreative Distribution Solutions products could adversely affect our business;

sensitivity of end-customers to increased sales taxes and economic conditions including significant increases in the rate of inflation and other declines in purchasing power;

uncertainty surrounding FDA compliance policy;

possible increasing international control and regulation;

failure to comply with environmental, health and safety regulations;

imposition of significant tariffs on imports into the U.S.; 

the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;

significant product liability litigation;

the effect of the COVID-19 pandemic on our business;

our amount of indebtedness;

the terms of our indebtedness, which may restrict our current and future operations;

our ability to comply with required disclosure requirements;

identification of a material weaknessweaknesses in our internal control related to ineffective information technology general controlsover financial reporting, which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price;

Changes in the method for determining LIBOR or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt;

our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;

our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors (as defined in our Certificate of Incorporation) being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;


future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us;

we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;

our business may be damaged by events outside of our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters;

adverse impact of climate change;

our reliance on information technology;

cybersecurity and privacy breaches;

failure to manage our growth;

failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;

fluctuations in our results;

exchange rate fluctuations;

adverse U.S. and global economic conditions;

departure of key management personnel or our inability to attract and retain talent;

infringement on or misappropriation of our intellectual property;

third-party claims that we infringe on their intellectual property; and

failure to meet expectations relatingrelating to environmental, social and governance factors.


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

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

 (unaudited)     (unaudited)    
  September 30,   December 31,  June 30,  December 31, 
ASSETS 2022  2021  2023  2022 
Current assets:            
Cash $105,672  $128,320  $100,507  $106,403 
Accounts receivable, net of allowances of $107 in 2022 and $262 in 2021
  11,453   6,496 
Accounts receivable, net of allowances of $103 in 2023 and $114 in 2022
  7,920   8,377 
Inventories  113,928   87,607   125,056   119,915 
Other current assets  24,729   26,746   18,216   22,959 
Total current assets  255,782   249,169   251,699   257,654 
Property, plant, and equipment, net  22,512   18,650   24,128   22,788 
Deferred income taxes  2,795   1,363   7,966   8,443 
Right of use assets  13,185   15,053   10,923   12,465 
Deferred financing costs, net  309   388   229   282 
Goodwill  162,120   162,333   136,244   136,253 
Other intangible assets, net  86,112   87,485   82,048   83,592 
Master Settlement Agreement (MSA) escrow deposits  27,845   31,720   28,229   27,980 
Other assets  29,129   35,399   18,208   22,649 
Total assets $599,789  $601,560  $559,674  $572,106 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable $9,247  $7,361  $10,802  $8,355 
Accrued liabilities  32,613   32,937   30,898   33,001 
Other current liabilities  21   38   5   20 
Total current liabilities  41,881   40,336   41,705   41,376 
Notes payable and long-term debt  416,029   414,172   379,195   406,757 
Lease liabilities  11,299   13,336   9,528   10,593 
Total liabilities  469,209   467,844   430,428   458,726 
                
Commitments and contingencies            
                
Stockholders’ equity:                
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
  -   -   -   - 
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 19,801,623 issued shares and 17,587,122 outstanding shares at September 30, 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; 19,912,039 issued shares and 17,595,579 outstanding shares at June 30, 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-
  -   -   -   - 
Additional paid-in capital  112,034   108,811   115,272   113,242 
Cost of repurchased common stock (2,214,501 shares at September 30, 2022, and 1,295,408 shares at December 31, 2021)
  (75,901)  (48,869)
Cost of repurchased common stock (2,316,460 shares at June 30, 2023 and December 31, 2022)
  (78,093)  (78,093)
Accumulated other comprehensive loss  (3,424)  (195)  (3,181)  (2,393)
Accumulated earnings  96,088   71,460   93,873   78,691 
Non-controlling interest  1,585   2,312   1,176   1,735 
Total stockholders’ equity  130,580   133,716   129,246   113,380 
Total liabilities and stockholders’ equity $599,789  $601,560  $559,674  $572,106 

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

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


 
Three Months Ended
September 30,
  
Three Months Ended
June 30,
 
 2022  2021  2023  2022 
            
Net sales $107,802  $109,904  $105,595  $102,925 
Cost of sales  55,090   55,635   53,117   51,456 
Gross profit  52,712   54,269   52,478   51,469 
Selling, general, and administrative expenses  32,891   31,894   31,933   33,323 
Operating income  19,821   22,375   20,545   18,146 
Interest expense, net  4,802   5,397   4,019   5,144 
Investment income  (75)  (157)
Investment loss
  4,080   6,227 
Gain on extinguishment of debt  -   (375)  (600)  - 
Income before income taxes  15,094   17,510   13,046   6,775 
Income tax expense  3,797   4,073   3,338   1,569 
Consolidated net income  11,297   13,437   9,708   5,206 
Net loss attributable to non-controlling interest  (239)  (31)  (217)  (218)
Net income attributable to Turning Point Brands, Inc. $11,536  $13,468  $9,925  $5,424 
                
Basic income per common share:                
Net income attributable to Turning Point Brands, Inc. $0.65  $0.71  $0.56  $0.30 
Diluted income per common share:                
Net income attributable to Turning Point Brands, Inc. $0.60  $0.65  $0.53  $0.30 
Weighted average common shares outstanding:                
Basic  17,749,294   18,897,974   17,584,241   18,063,259 
Diluted  21,102,006   22,364,807   20,409,943   21,443,279 

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

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


 
Nine Months Ended
September 30,
  
Six Months Ended
June 30,
 
 2022  2021  2023  2022 
            
Net sales $311,621  $340,188  $206,551  $203,819 
Cost of sales  155,646   172,685   105,456   100,556 
Gross profit  155,975   167,503   101,095   103,263 
Selling, general, and administrative expenses  98,779   95,900   62,708   65,888 
Operating income  57,196   71,603   38,387   37,375 
Interest expense, net  15,142   15,406   8,029   10,340 
Investment loss (income)  6,074   (292)
Loss on extinguishment of debt  -   5,331 
Investment loss
  8,879   6,149 
Gain on extinguishment of debt  (1,377)  - 
Income before income taxes  35,980   51,158   22,856   20,886 
Income tax expense  8,706   11,151   5,806   4,909 
Consolidated net income  27,274   40,007   17,050   15,977 
Net loss attributable to non-controlling interest  (684)  (598)  (472)  (445)
Net income attributable to Turning Point Brands, Inc. $27,958  $40,605  $17,522  $16,422 
                
Basic income per common share:                
Net income attributable to Turning Point Brands, Inc. $1.55  $2.14  $1.00  $0.90 
Diluted income per common share:                
Net income attributable to Turning Point Brands, Inc. $1.45  $1.95  $0.94  $0.86 
Weighted average common shares outstanding:                
Basic  18,021,554   18,988,435   17,556,030   18,159,940 
Diluted  21,401,485   22,464,542   20,538,947   21,603,113 

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

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


 
Three Months Ended
September 30,
  
Three Months Ended
June 30,
 
 2022  2021  2023  2022 
Consolidated net income $11,297  $13,437  $9,708  $5,206 
                
Other comprehensive income (loss), net of tax                
Unrealized loss on MSA investments, net of tax of $333 in 2022 and $14 in 2021
  (1,046)  (43)
Foreign currency translation, net of tax of $0 in 2022 and 2021
  (160)  (637)
Unrealized (loss) gain on derivative instruments, net of tax of $67 in 2022 and $1 in 2021
  (210)  3 
Unrealized loss on MSA investments, net of tax of $116 in 2023 and $244 in 2022
  (365)  (768)
Foreign currency translation, net of tax of $0 in 2023 and 2022
  (169)  45 
Unrealized loss on derivative instruments, net of tax of $150 in 2023 and $0 in 2022
  (472)  - 
  (1,416)  (677)  (1,006)  (723)
Consolidated comprehensive income  9,881   12,760   8,702   4,483 
Comprehensive loss attributable to non-controlling interest  (295)  (306)  (217)  (203)
Comprehensive income attributable to Turning Point Brands, Inc. $10,176  $13,066  $8,919  $4,686 


 
Nine Months Ended
September 30,
  
Six Months Ended
June 30,
 
 2022  2021  2023  2022 
Consolidated net income $27,274  $40,007  $17,050  $15,977 
                
Other comprehensive income (loss), net of tax                
Unrealized loss on MSA investments, net of tax of $934 in 2022 and $75 in 2021
  (2,940)  (235)
Foreign currency translation, net of tax of $0 in 2022 and 2021
  (122)  324 
Unrealized (loss) gain on derivative instruments, net of tax of $67 in 2022 and $811 in 2021
  (210)  2,628 
Unrealized gain (loss) on MSA investments, net of tax of $60 in 2023 and $602 in 2022
  188   (1,894)
Foreign currency translation, net of tax of $0 in 2023 and 2022
  (248)  38 
Unrealized loss on derivative instruments, net of tax of $259 in 2023 and $0 in 2022
  (815)  - 
  (3,272)  2,717   (875)  (1,856)
Consolidated comprehensive income  24,002   42,724   16,175   14,121 
Comprehensive loss attributable to non-controlling interest  (727)  (393)  (472)  (432)
Comprehensive income attributable to Turning Point Brands, Inc. $24,729  $43,117  $16,647  $14,553 

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

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


 
Nine Months Ended
September 30,
  
Six Months Ended
June 30,
 
 2022  2021  2023  2022 
Cash flows from operating activities:            
Consolidated net income $27,274  $40,007  $17,050  $15,977 
Adjustments to reconcile net income to net cash provided by operating activities:                
Loss on extinguishment of debt  -   5,331 
Gain on sale of property, plant, and equipment  (8)  (2)
Gain on extinguishment of debt
  (1,377)  - 
Loss (gain) on sale of property, plant, and equipment
  44   (8)
Depreciation expense  2,611   2,313   1,535   1,750 
Amortization of other intangible assets  1,373   1,431   1,542   919 
Amortization of deferred financing costs  1,936   1,895   1,225   1,291 
Deferred income tax (benefit) expense  (431)  1,528 
Deferred income tax expense (benefit)  659   (146)
Stock compensation expense  4,103   6,015   2,836   2,661 
Noncash lease income
  -   (49)  (29)  (6)
Loss (gain) on investments
  6,244   (144)
Loss on investments
  8,989   6,258 
Changes in operating assets and liabilities:                
Accounts receivable  (5,030)  1,324   456   (2,673)
Inventories  (26,467)  (10,970)  (5,146)  (27,499)
Other current assets  1,891   (491)  3,769   (598)
Other assets  1,211   685   (4,548)  624 
Accounts payable  2,074   3,488   2,500   7,240 
Accrued liabilities and other  (392)  (2,796)  (1,972)  1,359 
Net cash provided by operating activities $16,389  $49,565  $27,533  $7,149 
                
Cash flows from investing activities:                
Capital expenditures $(6,662) $(4,391) $(2,993) $(5,694)
Acquisitions, net of cash acquired
  -   (16,416)
Payments for investments
  (1,000)  (16,657)
Restricted cash, MSA escrow deposits  (10,169)  (14,783) $-  $(10,078)
Proceeds on the sale of property, plant and equipment  63   2   3   63 
Net cash used in investing activities $(17,768) $(52,245) $(2,990) $(15,709)
                
Cash flows from financing activities:                
Proceeds from Senior Secured Notes $-  $250,000 
Payments of 2018 first lien term loan  -   (130,000)
Settlement of interest rate swaps  -   (3,573)
Payment of promissory note  -   (9,625)
Convertible Senior Notes repurchased
 $(27,357) $- 
Proceeds from call options  70   - 
Payment of dividends  (3,259)  (3,056)  (2,209)  (2,181)
Payments of financing costs  -   (6,921)
Exercise of options  504   2,071   406   475 
Redemption of options  (155)  (2,111)  (346)  (155)
Redemption of stock units  (1,228)  - 
Redemption of performance restricted stock units
  (995)  (1,228)
Common stock repurchased  (27,032)  (20,481)  -   (19,418)
Net cash (used in) provided by financing activities $(31,170) $76,304 
Net cash used in financing activities
 $(30,431) $(22,507)
                
Net (decrease) increase in cash
 $(32,549) $73,624 
Net decrease in cash
 $(5,888) $(31,067)
Effect of foreign currency translation on cash $(324) $235  $(8) $56 
                
Cash, beginning of period:                
Unrestricted  128,320   41,765   106,403   128,320 
Restricted  15,155   35,074   4,929   15,155 
Total cash at beginning of period  143,475   76,839   111,332   143,475 
                
Cash, end of period:                
Unrestricted  105,672   130,551   100,507   107,429 
Restricted  4,930   20,147   4,929   5,035 
Total cash at end of period $110,602  $150,698  $105,436  $112,464 
                
Supplemental schedule of noncash investing activities:                
Accrued capital expenditures $57  $-  $42  $19 
                
Supplemental schedule of noncash financing activities:                
Dividends declared not paid $1,089  $1,255  $1,188  $1,110 
Accrued consideration for acquisition
 $-  $316 

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

Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Six Months Ended SeptemberJune 30, 20222023 and 20212022
(dollars in thousands except share data)
(unaudited)

             Accumulated                       Accumulated          
    Common  Additional  Cost of
  Other     Non-        Common  Additional  Cost of
  Other     Non-    
 Voting  Stock,  Paid-In  Repurchased
  Comprehensive  Accumulated  Controlling     Voting  Stock,  Paid-In  Repurchased
  Comprehensive  Accumulated  Controlling    

 Shares  Voting  Capital  Common Stock  Income (Loss)  Earnings
  Interest  Total  Shares  Voting  Capital  Common Stock  Income (Loss)  Earnings
  Interest  Total 
                                                        
Beginning balance July 1, 2022
  17,890,441  $198  $110,563  $(68,287) $(2,064) $85,641  $1,880  $127,931 
Beginning balance April 1, 2023
  17,585,529  $199  $113,477  $(78,093) $(2,234) $85,133  $1,452  $119,934 
                                                                
Unrealized loss on MSA investments, net of tax of $333
  -   -   -   -   (1,046)  -   -   (1,046)
Unrealized loss on derivative instruments, net of tax of $67  -   -   -   -   (210)  -   -   (210)
Unrealized loss on MSA investments, net of tax of $116
  -   -   -   -   (365)  -   -   (365)
Unrealized loss on derivative instruments, net of tax of $150  -   -   -   -   (472)  -   -   (472)
Foreign currency translation, net of tax of $0
  -   -   -   -   (104)  -   (56)  (160)  -   -   -   -   (110)  -   (59)  (169)
Stock compensation expense  -   -   1,442   -   -   -   -   1,442   -   -   2,093   -   -   -   -   2,093 
Exercise of options  3,053   -   29   -   -   -   -   29   4,416   -   49   -   -   -   -   49 
Redemption of options
  -   -   -   -   
-
   
-
   -   -   (15,985)  -   (346)  -   -   -   -   (346)
Performance restricted stock units issuance
  835   -   -   -   -   -   -   -   26,050   -   78   -   -   -   -   78 
Performance restricted stock units redeemed
  (4,431)  -   (105)  -   -   -   -   (105)
Settlement of call options, net of tax of $9
  -   -   26   -   -   -   -   26 
Dividends  -   -   -   -   -   (1,185)  -   (1,185)
Net income  -   -   -   -   -   9,925   (217)  9,708 
Ending balance June 30, 2023
  17,595,579  $199  $115,272  $(78,093) $(3,181) $93,873  $1,176  $129,246 
                                
                                
Beginning balance April 1, 2022
  18,180,174  $198  $109,073  $(59,491) $(1,326) $81,327  $2,083  $131,864 
                                
Unrealized loss on MSA investments, net of tax of $244
  -   -   -   -   (768)  -   -   (768)
Foreign currency translation, net of tax of $0
  -   -   -   -   30   -   15   45 
Stock compensation expense  -   -   1,502   -   -   -   -   1,502 
Exercise of options  7,175   -   230   -   -   -   -   230 
Redemption of options
  -   -   (155)  -   -   -   -   (155)
Performance restricted stock units issuance
  4,754   -   -   -   -   -   -   - 
Performance restricted stock units redeemed
  -   -   (87)  -   -   -   -   (87)
Cost of repurchased common stock  (307,207)  -   -   (7,614)  -   -   -   (7,614)  (301,662)  -   -   (8,796)  -   -   -   (8,796)
Dividends  -   -   -   -   -   (1,089)  -   (1,089)  -   -   -   -   -   (1,110)  -   (1,110)
Net income  -   -   -   -   -   11,536   (239)  11,297   -   -   -   -   -   5,424   (218)  5,206 
Ending balance September 30, 2022
  17,587,122  $198  $112,034  $(75,901) $(3,424) $96,088  $1,585  $130,580 
                                
                                
Beginning balance July 1, 2021
  18,923,523  $196  $105,460  $(24,277) $279  $48,647  $3,963  $134,268 
                                
Unrealized gain on MSA investments, net of tax of $14
  -   -   -   -   (43)  -   -   (43)
Unrealized gain on derivative instruments, net of tax of $1
  -   -   -   -   3   -   -   3 
Foreign currency translation, net of tax of $0
  -   -   -   -   (362)  -   (275)  (637)
Stock compensation expense  -   -   1,752   -   -   -   -   1,752 
Exercise of options  74,660   1   1,184   -   -   -   -   1,185 
Cost of repurchased common stock  (125,000)  -   -   (6,395)  -   -   -   (6,395)
Acquisition of Recreation Marketing interest
  -   -   (1,127)  -   -   -   (1,123)  (2,250)
Dividends  -   -   -   -   -   (1,063)  -   (1,063)
Net income  -   -   -   -   -   13,468   (31)  13,437 
Ending balance September 30, 2021
  18,873,183  $197  $107,269  $(30,672) $(123) $61,052  $2,534  $140,257 
Ending balance June 30, 2022
  17,890,441  $198  $110,563  $(68,287) $(2,064) $85,641  $1,880  $127,931 

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

Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2022 and 2021
(dollars in thousands except share data)
(unaudited)

             Accumulated                       Accumulated          
    Common  Additional
  Cost of
  Other     Non-        Common  Additional
  Cost of
  Other     Non-    
 Voting  Stock,  Paid-In  Repurchased
  Comprehensive  Accumulated  Controlling     Voting  Stock,  Paid-In  Repurchased
  Comprehensive  Accumulated  Controlling    

 Shares  Voting  Capital  Common Stock  Income (Loss)  Earnings
  Interest  Total  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 
                                                        
Beginning balance January 1, 2022
  18,395,476  $197  $108,811  $(48,869) $(195) $71,460  $2,312  $133,716 
                                
Unrealized loss on MSA investments, net of tax of $934
  -   -   -   -   (2,940)  -   -   (2,940)
Unrealized loss on derivative instruments, net of tax of $67  -   -   -   -   (210)  -   -   (210)
Unrealized gain on MSA investments, net of tax of $60
  -   -   -   -   188   -   -   188 
Unrealized loss on derivative instruments, net of tax of $259  -   -   -   -   (815)  -   -   (815)
Foreign currency translation, net of tax of $0
  -   -   -   -   (79)  -   (43)  (122)  -   -   -   -   (161)  -   (87)  (248)
Stock compensation expense  -   -   4,103   -   -   -   -   4,103   -   -   2,836   -   -   -   -   2,836 
Exercise of options  35,394   -   504   -   -   -   -   504   29,371   -   406   -   -   -   -   406 
Redemption of options  -   -   (155)  -   -   -   -   (155)  (15,985)  -   (346)  -   -   -   -   (346)
Issuance of performance restricted stock units
  
75,345
   1   (1)  -   -   -   -   - 
Redemption of performance restricted stock units  -   -   (1,141)  -   -   -   -   (1,141)
Performance restricted stock units issuance
  
140,324
   1   77   -   -   -   -   78 
Performance restricted stock units redeemed
  (43,294)  -   (995)  -   -   -   -   (995)
Settlement of call options, net of tax of $17
  -   -   52   -   -   -   -   52 
Dividends  -   -   -   -   -   (2,340)  -   (2,340)
Net income  -   -   -   -   -   17,522   (472)  17,050 
Ending balance June 30, 2023
  17,595,579  $199  $115,272  $(78,093) $(3,181) $93,873  $1,176  $129,246 
                                
                                
Beginning balance January 1, 2022
  18,395,476  $197  $108,811  $(48,869) $(195) $71,460  $2,312  $133,716 
                                
Unrealized loss on MSA investments, net of tax of $602
  -   -   -   -   (1,894)  -   -   (1,894)
Foreign currency translation, net of tax of $0
  -   -   -   -   25   -   13   38 
Stock compensation expense  -   -   2,661   -   -   -   -   2,661 
Exercise of options  32,341   -   475   -   -   -   -   475 
Redemption of options
  -   -   (155)  -   -   -   -   (155)
Performance restricted stock units issuance
  74,510   1   (1)  -   -   -   -   - 
Performance restricted stock units redeemed
  -   -   (1,141)  -   -   -   -   (1,141)
Redemption of restricted stock units
  -   -   (87)  -   -   -   -   (87)  -   -   (87)  -   -   -   -   (87)
Cost of repurchased common stock  (919,093)  -   -   (27,032)  -   -   -   (27,032)  (611,886)  -   -   (19,418)  -   -   -   (19,418)
Dividends  -   -   -   -   -   (3,330)  -   (3,330)  -   -   -   -   -   (2,241)  -   (2,241)
Net income  -   -   -   -   -   27,958   (684)  27,274   -   -   -   -   -   16,422   (445)  15,977 
Ending balance September 30, 2022
  17,587,122  $198  $112,034  $(75,901) $(3,424) $96,088  $1,585  $130,580 
                                
                                
Beginning balance January 1, 2021
  19,133,794  $195  $102,423  $(10,191) $(2,635) $23,645  $4,050  $117,487 
                                
Unrealized loss on MSA investments, net of tax of $75
  -   -   -   -   (235)  -   -   (235)
Unrealized gain on derivative instruments, net of tax of $811
  -   -   -   -   2,628   -   -   2,628 
Foreign currency translation, net of tax of $0
  -   -   -   -   119   -   205   324 
Stock compensation expense  -   -   6,015   -   -   -   -   6,015 
Exercise of options  158,420   2   2,069   -   -   -   -   2,071 
Redemption of options
  -   -   (2,111)  -   -   -   -   (2,111)
Cost of repurchased common stock  (419,031)  -   -   (20,481)  -   -   -   (20,481)
Acquisition of Recreation Marketing interest  -   -   (1,127)  -   -   -   (1,123)  (2,250)
Dividends  -   -   -   -   -   (3,198)  -   (3,198)
Net income  -   -   -   -   -   40,605   (598)  40,007 
Ending balance September 30, 2021
  18,873,183  $197  $107,269  $(30,672) $(123) $61,052  $2,534  $140,257 
Ending balance June 30, 2022
  17,890,441  $198  $110,563  $(68,287) $(2,064) $85,641  $1,880  $127,931 

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

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

Note 1. Description of Business and Basis of Presentation

Description of Business

Turning
Turning Point Brands, Inc. and its subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products. The Company sells a wide range of products to adult consumers consisting of staple products with its iconic brands Zig-Zag® and Stoker’s® and its next generation products to fulfill evolving consumer preferences. The Company’s three focusIts segments are led by its 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 its distribution platforms (segment.Vapor Beast®, VaporFi® and Direct Vapor®)and Solace® in the NewGen Products segment.The Company’s products are available in more than 217215,000,000 retail outlets in North America. The Company operates in three segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) NewGen Products.Creative Distribution Solutions (formerly known as NewGen).

Basis of Presentation

TheThe accompanying unaudited interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2021, included in its Annual Report on Form 10-K for the year then ended.2022. In the opinion of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated. Such adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021.2022. The accompanying interim, consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“GAAP”) with respect to annual financial statements.statements.

Note 2. Summary of Significant Accounting Policies

Consolidation

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

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards 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 beingto 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.

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 1716, “Segment Information”. An additional disaggregation of contract revenue by sales channel can be also found within Note 17 “Segment Information.”16 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $5.8$5.7 million and $7.1 $6.0 million for the three months ending SeptemberJune 302022, 2023 and 2021,2022, respectively. Shipping costs incurred were approximately $17.9$11.9 million and $21.1$12.1 million for the ninesix months ending SeptemberJune 30,2022 2023 and 2021,2022, respectively.

Inventories

Inventories are stated at the lower of cost or net realizable value using the 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(Level 1) and the lowest priority to unobservable inputs (level(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 CompanyCompany enters into foreign currency forwardforward 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 foreign currency hedging policy, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forwardforward period not to exceed twelve months. The Company may also, from time to time, hedge up to ninety percent100% 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 transferredreclassified 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.

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 NewGenCreative Distribution Solutions products due to malfunctioning devices, batteries, or marketing practices.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 SeptemberJune 30, 2023, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $28.2 million. At December 31, 2022, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $27.8 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-Zag branded 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.


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 June 30, 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)  746   (59)  687   10,226   (1,251)  8,975 
U.S. Governmental agency obligations (unrealized position > 12 months)  29,398   (3,785)  25,613   19,918   (2,842)  17,076 
  $32,073  $(3,844) $28,229  $32,073  $(4,093) $27,980 
  As of September 30, 2022  As of December 31, 2021 
     Gross  Gross  Estimated     Gross  Gross  Estimated 

 
  Unrealized  Unrealized  Fair     Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value  Cost
  Gains  Losses  Value 
Cash and cash equivalents $1,928  $-  $-  $1,928  $12,155  $-  $-  $12,155 
U.S. Governmental agency obligations
(unrealized position < 12 months)
  15,712   -   (1,898)  13,814   19,918
   4   (357)  19,565 
U.S. Governmental agency obligations
(unrealized position > 12 months)
  14,433   -   (2,330)  12,103   -   -   -   - 
  $32,073  $-  $(4,228) $27,845  $32,073  $
4  $
(357) $
31,720 

 As of  As of 
  September 30, 2022 June 30, 2023 
Less than one year $-  $2,199 
One to five years  7,443   9,242 
Five to ten years  20,747   16,748 
Greater than ten years  1,955   1,955 
Total $30,145  $30,144 

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


 Deposits as of  Deposits as of 
Sales
Year
 
September 30,
2022
  
December 31,
2021
  
June 30,
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):FDA: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “FSPTCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of four 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.

The FDA currently assesses tobacco product user fees on 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.

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 NewGenCreative 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;tobacco; (iv) hookah products;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 PMTAPremarket 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.

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-derivedregulated products all of whichin order to continue selling these products while they 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;information and have responded to information requests from the FDA; however, there can be no guarantee that the FDA will accept such amendments and responses or that the applications will meet the standard of “appropriate for the protection of public health.health” or “substantially equivalent, as appropriate. 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, filing deadline.
On October 5, 2021, the FDA finalized two rules related to the Substantial Equivalence process and the PMTAPremarket Tobacco Product Application process, respectively, which both became effective November 4, 2021. Both final rules (collectively, the “Rules”) indicate that any new or additional requirements will not retroactively apply to currently pending 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 increaseincreases 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.

In addition, we currently distribute many third-party manufactured vapor products for which we 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 thereAdditionally, FDA has limited resources, which may impact its ability to be a lack of enforcement, whichmeaningfully enforce these provisions. This may adversely affect our ability to compete in the marketplace against those who continue to sell unauthorized products.products; however, regulatory uncertainty in the FDA’s enforcement policies may likewise affect operations or sales of our proprietary products if the FDA’s policies or priorities shift.

On May 4, 2022, the FDA 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. We carry certain products that may be subject of the characterizing flavor ban in cigars, should it be finalized in its proposed form. 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 during whichwhere we were ablehave had the opportunity to provide comments with regard to the impact such standards would have on our products. These proposed rules remain pending. 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.

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)(“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. 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:

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 foreign currency hedging 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, notup to exceed 90%100% of the purchase price.  During the third quarter of 2022,six months ended June 30, 2023, the Company executed various optionforeign exchange contracts, which met hedge accounting requirements for the purchase of €18.5€10.9 million with maturity dates ranging from August 2022 to March 2023. and the sale of 6.0 million.

At SeptemberJune 30, 2022,2023, the Company had optionforeign currency contracts for the purchase of €15.2€10.9 million outstanding.and sale of €6.0 million. The foreign currency contracts’ fair value at SeptemberJune 30, 2022,2023, resulted in an asset of $0.2 million which is included in Other current assets and a liability of $0.5$0.1 million included in Accrued liabilities. At December 31, 2021,2022, the Company had no foreign currency contracts outstandingfor the purchase of €18.5 million and sale of €18.5 million. The foreign currency contracts’ fair value at December 31, 2022, resulted in an asset of $1.2 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities..

Interest Rate Swaps

The Company’s interest rate hedging 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, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fixed LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value was recorded to other comprehensive income. The Company used the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The Company terminated the interest rate swap agreement in conjunction with the prepayment of all outstanding amounts under the 2018 First Lien Credit Facility (as defined below) 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.

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.

Cash and Cash Equivalents

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

Accounts Receivable

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

Long-Term Debt

The Company’s Senior Secured Notes (as(as defined in Note 11, “Notes Payable and Long-Term Debt)10) bear interest at a rate of 5.625% per year. As of SeptemberJune 30, 2023, the fair value approximated $228.3 million, with a carrying value of $250 million. As of December 31, 2022, the fair value of the Senior Secured Notes approximated $220.8$226.4 million, with a carrying value of $250$250 million. 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.

The Convertible Senior Notes (as(as defined in Note 11, “Notes Payable and Long-Term Debt)10) bear interest at a rate of 2.50% per year, and the fair value of the Convertible Senior Notes without the conversion feature approximated $144.2 124.9 million,, with a carrying value of $172.5 133.5 million as of SeptemberJune 30, 20222023. 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 million162.5 .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:

 September 30,  December 31,  June 30,  December 31, 

 2022  2021  2023  2022 
Raw materials and work in process $7,041  $6,936  $5,552  $7,283 
Leaf tobacco  46,231   35,900   55,794   43,468 
Finished goods - Zig-Zag Products  39,926   25,663   42,855   42,279 
Finished goods - Stoker’s Products  10,818   8,959   9,671   9,667 
Finished goods - NewGen products  8,447   8,591 
Finished goods - Creative Distribution Solutions
  9,410   15,431 
Other  1,465   1,558   1,774   1,787 
Inventories $113,928  $87,607  $125,056  $119,915 

The inventory valuation allowance was $3.7$4.2 million and $7.7$4.5 million as of SeptemberJune 30, 2022,2023, and December 31, 2021,2022, respectively.

Note 7.6. Other Current Assets

Other current assets consist of:

 September 30,  December 31,  June 30,  December 31, 

 2022  2021  2023  2022 
Inventory deposits $2,823  $12,091  $4,969  $6,395 
Insurance deposit  3,000   3,000   3,000   3,000 
Prepaid taxes
  783
   -
   976
   448
 
Other  18,123   11,655   9,271   13,116 
Total $24,729  $26,746  $18,216  $22,959 

Note 8.7. Property, Plant, and Equipment

Property, plant, and equipment consists of:

 September 30,  December 31,  June 30,  December 31, 

 2022  2021  2023  2022 
Land $22  $22  $22  $22 
Buildings and improvements  3,096   3,096   3,096   3,096 
Leasehold improvements  5,394   5,374   5,409   5,404 
Machinery and equipment  24,821   19,591   28,451   25,832 
Furniture and fixtures  9,254   9,402   9,403   9,264 
Gross property, plant and equipment  42,587   37,485   46,381   43,618 
Accumulated depreciation  (20,075)  (18,835)  (22,253)  (20,830)
Net property, plant and equipment $22,512  $18,650  $24,128  $22,788 

Note 9.8. Other Assets

Other assets consist of:

 September 30,  December 31,  June 30,  December 31, 

 2022  2021  2023  2022 
Equity investments $19,282  $25,649  $4,627  $13,376 
Debt security investment 
9,240  
8,000
  
7,488  
7,820
 
Other  607   1,750   6,093   1,453 
Total $29,129  $35,399  $18,208  $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 the second quarter 2022, based on a contemplated sale of the assets of dosist, the Company deemed its investment was impaired resulting in decreasing of the fair value of the investment to $1.6 million. Fair value was determined using a valuation derived from the contemplated purchase price (Level 3). This resulted in a loss of $6.3 million which is recorded in investment loss for the nine months ended September 30, 2022.

In July 2021, the Company invested $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 with an original maturity ofand matures July 31, 2026, which was extended to July 21, 2027 when the Company made its additional investment in Old Pal in July 2022. 2026.Interest and principal not paid to date are payablereceivable 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 meetingreaching certain sales thresholds. The weighted average interest rate on the convertible note was 3% 3.0% for the ninethree and six months ended SeptemberJune 30, 2022.2023. Old Pal has the option to convert the note into shares once sales reach a certain threshold. Additionally, the Company has the right to convert the note into shares of Old Pal at any time. The conditions required to allow Old Pal to convert the note were not met as of SeptemberJune 30, 2023. Additionally, the Company has the right to convert the note into shares at any time after January 1, 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 expense, netincome in our Consolidated Statements of Income. TheQuarterly, we perform a qualitative assessment to determine if the fair value of the debt security approximated its carryinginvestment could be less than the amortized cost basis.  The fourth quarter 2022 qualitative assessment determined that the fair value of $9.2 million at September 30, 2022the investment could be less than the amortized cost basis and $8.0 million attherefore the Company performed a quantitative assessment of the fair value of the investment.  The fair value as of December 31, 2021, due2022 was determined to be $7.9 million based on a Monte Carlo simulation (Level 3).  The Company determined that the recencyimpairment 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 year ended December 31, 2022. In the second quarter of 2023, based on a subsequent quantitative assessment of the debt security’s purchasefair value using a Monte Carlo simulation, the Company determined the fair value to be $7.7 million and recorded an additional allowance for credit losses of $0.3 million which is included in investment loss for the additional funding in the current period, related to each such date.quarter ended June 30, 2023. The Company has recorded accrued interest receivable of $0.1$0.3 million and $0.1 million at SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively, in other current assets on our Consolidated Balance Sheets.
In April 2021, the Company invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD. The Company has additional follow-on investment rights. As part of the investment, the Company has obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products. 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 for the three months ended March 31, 2023. In the second quarter of 2023, based on a significant change in Docklight’s business model, the Company deemed its investment in Docklight fully impaired resulting in an additional loss of $3.8 million bringing the fair value of the Company’s investment in Docklight to zero. Impairment losses for the Company’s investment in Docklight are recorded in Investment loss on our Consolidated Statements of Income.  Fair value for both periods was determined using a valuation derived from relevant revenue multiples (Level 3).

Note 10.9. Accrued Liabilities

Accrued liabilities consist of:

 September 30,  December 31,  June 30,  December 31, 

 2022  2021  2023  2022 
Accrued payroll and related items $7,771  $6,974  $4,729  $7,685 
Customer returns and allowances  7,108   6,497   7,444   7,291 
Taxes payable  2,984   2,053   2,008   1,867 
Lease liabilities  3,130   2,976   2,596   3,102 
Accrued interest  2,682   7,318   6,830   7,277 
Other  8,938   7,119   7,291   5,779 
Total $32,613  $32,937  $30,898  $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:

 September 30,  December 31,  June 30,  December 31, 

 2022  2021  2023  2022 
Senior Secured Notes $250,000  $250,000  $250,000  $250,000 
Convertible Senior Notes  172,500   172,500   133,541   162,500 
Gross notes payable and long-term debt  422,500   422,500   383,541   412,500 
Less deferred finance charges  (6,471)  (8,328)  (4,346)  (5,743)
Notes payable and long-term debt $416,029  $414,172  $379,195  $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.

The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior toon or after February 15, 2023, at the redemption prices (expressed as a price equal to 100%percentage of the principal amount of the Notes redeemedto 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, 2023102.813%
On or after February 15, 2024101.406%
On or after February 15, 2025 and thereafter100.000%

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.

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 SeptemberJune 30, 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 On May 10, 2023, the Company and certain of its subsidiaries, as guarantors, entered into an amendment (the “Amendment”) to the 2021 Revolving Credit Facility provides for(as amended, the “Amended Revolving Credit Facility”).  The Amendment includes certain modifications to the 2021 Revolving Credit Facility relating to the replacement of the London Inter-Bank Offered Rate with a revolving line of credit of upSecured Overnight Financing Rate (“SOFR”) as the interest rate benchmark under the 2021 Revolving Credit Facility and adjusts certain other provisions to $25.0reflect current documentation standards and other agreed modifications.

million. Letters of credit are limited to $1010.0 million (and are a part of, and not in addition to, the revolving line of credit). The Company has not drawn any borrowings under the 2021Amended Revolving Credit Facility but does have letters of credit of approximately $3.61.4 million outstanding under the facility as of SeptemberJune 30, 2022.2023. The 2021Amended 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 2021Amended Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate or the Term SOFR rate, as applicable, 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 2021Amended Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021Amended Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.

The 2021Amended Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021Amended Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the 2021Amended 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 2021Amended 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 $5.0 million) in the aggregate outstanding exceeds 35% of the total commitments under the 2021Amended Revolving Credit Facility. The 2021Amended Revolving Credit Agreement provides for customary events of default. The Company was in compliance with all covenants as of SeptemberJune 30, 2022.2023.

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

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 fourth quarter of 2022, a wholly owned subsidiary of the Company repurchased $10.0 million in aggregate principal amount of the Convertible Senior Notes on the open market resulting in a $0.9 million gain on extinguishment of debt. Subsequent repurchases occurred in the first and second quarters of 2023 for $13.9 million and $15.1 million, respectively, in aggregate principal amounts resulting in gains on extinguishment of debt of $0.7 million and $0.6 million, respectively. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable securities law. As of June 30, 2023, $133.5 million aggregate principal remains outstanding and held by third parties.

The Convertible Senior Notes held by third parties are convertible into approximately 3,213,5892,455,360 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of 18.63018.6789 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.68$53.54 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 SeptemberJune 30, 2022.

2023. Subsequent to the balance sheet date the Convertible Senior Notes became current in the amount of $133.5 million. Based on the current liquidity, free cash flow generation and other financing options, the Company believe there will be adequate liquidity to address the maturity of the Convertible Senior Notes. 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 $53.68$53.54 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 of certain Durfort assets, the Company issued the Promissory Note in the principal amount of $10.0 million, with an annual interest rate of 7.5%, payable quarterly, with the first interest payment due September 10, 2020The 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, corporate offices and head officesretail space as well as vehicle leases. At lease inception, the Company recognizes a lease right of use asset and lease liability calculated as the present value of future minimum lease payments. In general, the Company does not recognize any renewal periods within the lease terms as there are no significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.

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

The components of lease expense consisted of the following:


 
Three Months Ended
September 30,
  
Three Months Ended
June 30,
 

 2022
  2021
  2023
  2022
 
Operating lease cost            
Cost of sales $240  $225  $129  $233 
Selling, general and administrative  680
   771
   503
   386
 
Variable lease cost (1)  235
   214
   407
   211
 
Short-term lease cost  6
   13
   7
   11
 
Total $1,161  $1,223  $1,046  $841 

(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.

  Three Months Ended June 30, 
  2023  2022 
Financing lease cost      
Selling, general and administrative $348  $297 
Total $348  $297 


 
Nine Months Ended
September 30,
  
Six Months Ended
June 30,
 
 2022


2021
  2023


2022
 
Operating lease cost          
Cost of sales $700  $682  $257  $460 
Selling, general and administrative  2,053
   2,285
   1,024
   785
 
Variable lease cost (1)  558
   954
   632
   323
 
Short-term lease cost  31
   35
   13
   25
 
Sublease income  -
  (60)
Total  $3,342
   $3,896
   $1,926
   $1,593
 

  Six Months Ended June 30, 
  2023  2022 
Financing lease cost      
Selling, general and administrative $686  $588 
Total $686

$588 

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

  September 30,   December 31,  June 30,  December 31, 
 2022  2021  2023  2022 
Assets:            
Right of use assets $13,185  $15,053 
Right of use assets - Operating
 $9,983  $10,967 
Right of use assets - Financing
 
940  
1,498 
Total lease assets $13,185  $15,053  $10,923  $12,465 
                
Liabilities:                
Current lease liabilities (2)
 $3,130  $2,976 
Long-term lease liabilities 
11,299

 
13,336
 
Current lease liabilities - Operating (2)
 $1,947  $2,007 
Current lease liabilities - Financing (2)
 
649  
1,095 
Long-term lease liabilities - Operating
 
9,272  
10,243 
Long-term lease liabilities - Financing
  256   350 
Total lease liabilities $14,429  $16,312  $12,124  $13,695 

(2)Reported within accrued liabilities on the balance sheet.


 As of September 30, 
  2022  2021 
Weighted-average remaining lease term - operating leases 6.2 years  6.8 years 
Weighted-average discount rate - operating leases  4.86%  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 September 30, 2022, maturities of lease liabilities consisted of the following:

  September 30, 

 2022 
2022 $941 
2023  3,685 
2024  2,551 
2025  2,234 
2026  2,133 
Years thereafter  5,344 
Total lease payments $16,888 
Less: Imputed interest  2,459 
Present value of lease liabilities $14,429 

Note 13.12. Income Taxes

The Company’s effective income tax rate for the three and nine months ended September 30, 2022, was 25.2% and 24.2%, respectively, which includes a discrete tax deduction of $0.0 million and $0.7 million for the three and nine months ended September 30, 2022, respectively, relating to stock option exercises. The Company’s effective income tax rate for the three and ninesix months ended SeptemberJune 30, 20212023 was 25.6% and 25.4%, respectively. The Company’s effective income tax rate for the three and six months ended June 30, 2022 was 23.3%23.2% and 21.8%23.5%, respectively,,  which includes a discrete tax deduction of $1.0$0.3 million and $6.2$0.7 million, for the three and nine months ended September 30, 2021, respectively,, relating to stock option exercisesexercises.

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 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 SeptemberJune 30, 2022,2023, net of forfeitures, there were 103,282277,397 Restricted Stock Units (“RSUs”), 106,912120,746 options and 11,93630,559 Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 1,167,922961,350 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 no 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 no shares available for grant under the 2006 Plan.

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

 
  Weighted  Weighted  
  Weighted  Weighted 
 Stock  Average  Average  Stock  Average  Average 
 Option  Exercise  Grant Date  Option  Exercise  Grant Date 

 Shares  Price  Fair Value  Shares  Price  Fair Value 
Outstanding, December 31, 2020  711,060  $19.58  $6.42 
            
Granted  119,500   50.93   13.58 
Exercised  (202,768)  10.22   6.35 
Forfeited  (7,957)  33.22   9.63 
Outstanding, December 31, 2021
  619,835   28.51   8.70   619,835  $28.51  $8.70 
                        
Granted  114,827   30.58   10.34   114,827   30.58   10.34 
Exercised  (40,331)  12.49   4.08   (40,331)  12.49   4.08 
Forfeited  (10,779)  32.20   9.25   (11,117)  32.60   9.35 
Outstanding, September 30, 2022
  683,552  $29.74  $9.24 
Outstanding, December 31, 2022
  683,214  $
29.74  $
9.24 
            
Granted  77,519   20.71   6.45 
Exercised  (29,371)  13.84   4.37 
Forfeited  (62,987)  26.61   9.00 
Outstanding, June 30, 2023
  668,375  $29.68  $9.15 

Under the 2006, 2015 and 2021 Plans, the total intrinsic value of options exercised during the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, was $0.7$0.2 million, and $7.9$0.5 million, respectively.

At SeptemberJune 30, 2022,2023, under the 2006 Plan, the exercise price for the 74,37946,824 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 1.711.11 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 assumptionsassumptions: 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 no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.

At SeptemberJune 30, 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,  May 17,  March 7,  March 20,  October 24,  March 18,    February 18,  May 3, 

 2017  2017  2018  2019  2019  2020  2021  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 September 30, 2022
  20,000   44,983   58,067   141,784   25,000   93,248   93,516   12,000 
Number exercisable at September 30, 2022
  20,000   44,983   58,067   141,784   25,000   61,081   39,165   4,080 
Options outstanding at June 30, 2023
  20,000   39,983   51,567   125,984   25,000   82,068   91,287   12,000 
Number exercisable at June 30, 2023
  20,000   39,983   51,567   125,984   25,000   82,068   64,564   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  4.37   4.63   5.44   6.47   7.07   7.47   8.39   8.59   3.62   3.88   4.69   5.73   6.32   6.72   7.64   7.85 
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  -   -   0.83%  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 

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,  March 14,  April 29,  May 12, 
 2021  2022 2022  2021  2022  2022  2023 
Number of options granted  7,500   100,000   14,827   7,500   100,000   14,827   77,519 
Options outstanding at September 30, 2022
  7,500   98,248   14,827 
Number exercisable at September 30, 2022
  2,550   -   - 
Options outstanding at June 30, 2023
  7,500   73,816   14,827   77,519 
Number exercisable at June 30, 2023
  5,100   25,295   5,042   38,760 
Exercise price $45.05  $30.46  $31.39  $45.05  $30.46  $31.39  $20.71 
Remaining lives  8.63   9.46   9.59   7.88   8.71   8.84   9.87 
Risk free interest rate  0.84%  2.10%  2.92%  0.84%  2.10%  2.92%  3.41%
Expected volatility  31.50%  35.33%  35.33%  31.50%  35.33%  35.33%  34.51%
Expected life  6.000   6.000   6.000   6.000   6.000   6.000   5.186 
Dividend yield  0.63%  1.01%  0.98%  0.63%  1.01%  0.98%  1.61%
Fair value at grant date $13.23  $10.23  $
11.07  $13.23  $10.23  $11.07  $
6.45 

The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.3$0.5 million and $0.3 million for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The Company recorded compensation expense related to the options of approximately $0.8$0.5 million and $2.0$0.5 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Total unrecognized compensation expense related to options at SeptemberJune 30, 2022,2023, is $1.0$0.7 million, which will be expensed over 1.98 years.1.23 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 SeptemberJune 30, 20222023, there are 472,701460,334 PRSUs outstanding, all of which are unvested.outstanding. The following table outlines the PRSUs granted and outstanding as of SeptemberJune 30, 20222023.

 March 7,  March 20,  July 19,  March 18,  December 28,  February 18, March 14,  March 20,  March 18,  December 28,  February 18, March 14,  May 4,
 

 2018  2019  2019  2020  2020  2021 2022  2019  2020  2020  2021 2022  2023 
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   133,577 
PRSUs outstanding at September 30, 2022
  89,600   77,380   21,342   85,810   58,779   91,190 48,600 
PRSUs outstanding at June 30, 2023
  77,380   85,410   31,040   88,490   44,437   133,577 
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  $22.25 
Remaining lives  0.25   1.25   0.25   2.24   1.25   3.25 4.25   0.50   1.50   0.50   2.50   3.50   2.75 

The Company recorded compensation expense related to the PRSUs of approximately $0.8$0.6 million and $1.3$0.8 million in the consolidated statements of income for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately $2.4$1.1 million and $3.9$1.6 million in the consolidated statements of income for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at SeptemberJune 30, 2022,2023, is $4.7$7.3 million which will be expensed over the service periods based on the probability of achieving the performance condition.condition.


The Company has granted 93,249229,553 RSUs which vest over one to five years. The following table outlines the RSUs granted and outstanding as of SeptemberJune 30, 2022.2023.


 March 14,  March 14,  April 29, April 29,  March 14,  March 14,  April 29,  May 5,   May 5,  May 8, 
 2022  2022  2022 2022  2022  2022  2022  2023   2023  2023 
Number of RSUs granted  50,004   28,726   11,393 
4,522   50,004   28,726   4,522   130,873  
22,472 
20,101 
RSUs outstanding at September 30, 2022  48,608   28,726   11,393 4,522 
RSUs outstanding at June 30, 2023  43,860   18,961   4,522   130,873   11,236 20,101 
Fair value as of grant date $30.46  $30.46  $31.39 $31.39  $30.46  $30.46  $31.39  $22.25 
$
22.25 $
21.77 
Remaining lives  4.25   2.25   0.57 4.25   3.50   1.50   3.50   2.75   0.50 0.86 



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 $0.4$1.0 million and $0.1$0.4 million for the three months ended SeptemberJune 30, 20222023 and 2021, respectively.2022. The Company recorded compensation expense related to the RSUs of approximately $0.9$1.3 million and $0.2$0.6 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Total unrecognized compensation expense related to RSUs at SeptemberJune 30, 2022,2023, is $2.1$4.3 million, which will be expensed over 3.442.56 years.

Note 15.14. Contingencies

On October 9, 2020, a purported stockholder of Turning Point Brands, Inc. (“TPB” or the “Company”), Paul-Emile Berteau (the “Plaintiff”), filed a complaint in the Delaware Court of Chancery (the “Court”) relating to the merger of SDIStandard Diversified, Inc. (“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.Sub (“Action”). The complaint purports to assert two derivative counts for breach of fiduciary duty on TPB’s behalf and against the TPB Board of Directors and certain SDI affiliates.affiliates (collectively, the “Defendants”). 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 courtCourt granted in part and denied in part the defendants’Defendants’ motions to dismiss. Among other things, the courtCourt dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the plaintiff’sPlaintiff’s complaint as moot.

The remaining defendants answeredDefendants and the Company deny any wrongdoing but following a mediation in November 2022, the Defendants agreed to settle with the Plaintiff to eliminate the distraction, burden, expense, risks and potential delay of further litigation involving the asserted claims. The parties entered into a Stipulation and Agreement of Compromise, Settlement and Release, dated and filed with the Court on June 27, 2023 (together with the exhibits thereto, the “Settlement Stipulation”).  The material terms of the proposed settlement of the Action include, among other things, that the Defendants’ insurers will pay or cause to be paid an aggregate of $5,000,000 into an escrow account (the “Settlement Payment”) in exchange for a release of all claims. Plaintiff also intends to seek an award of attorneys’ fees and expenses to Plaintiff’s counsel of up to $1,000,000 and an additional mootness fee of up to $500,000 in connection with the third count of the complaint on August that23, will be paid out of the Settlement Payment with the remaining funds paid to the Company. The proposed settlement is subject to2021, and continueconditioned on approval by the Court, and no assurances can be given that such Court approval will be obtained. The impact to litigate. The parties plan to mediate the case in late November 2022.While the Company believes it has good and valid defensesis 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. 

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 NewGenCreative Distribution Solutions products. The Company is still evaluating these claims and the potential defenses to them.them and may from time to time settle some such suits in order to eliminate distraction, burden, expense, risks and potential delay of further litigation involving the asserted claims. 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.

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 While we have received some such cases and investigative requests.requests with regard to the marketing of our vapor products, no regulatory bodies have taken action against us with regard to our marketing practices. In the acquisition of the vapor businesses, we negotiated financial “hold-backs”, which we have usedexpect 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.matters discussed below. 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 two franchisor subsidiaries, one of which no longer has any franchisees.subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from time to timetime-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.

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 September 30,  Three Months Ended June 30, 
 2022  2021  2023  2022 
       Per        Per        Per        Per 
 Income  Shares  Share  Income  Shares  Share  Income  Shares  Share  Income  Shares  Share 
Basic EPS:                                    
Numerator                                    
Net income attributable to Turning Point Brands, Inc. $11,536        $13,468        $9,925        $5,424       
                                        
Denominator                                        
Weighted average      17,749,294  $0.65       18,897,974  $0.71       17,584,241  $0.56       18,063,259  $0.30 
                                                
Diluted EPS:                                                
Numerator                                                
Net income attributable to Turning Point Brands, Inc. $11,536          $13,468          $9,925          $5,424         
Interest expense related to Convertible Senior Notes, net of tax  1,054           1,054           846           1,054         
Diluted net income attributable to Turning Point Brands. Inc. $12,590          $14,522          $10,771          $6,478         
                                                
Denominator                                                
Basic weighted average      17,749,294           18,897,974           17,584,241           18,063,259     
Convertible Senior Notes      3,213,589           3,207,293           2,625,714           3,211,484     
Stock options      139,123           259,540     
Stock options and restricted stock units
      199,988           168,536     
      21,102,006  $0.60       22,364,807  $0.65       20,409,943  $0.53       21,443,279  $0.30 


 Nine Months Ended September 30,  Six Months Ended June 30, 
 2022  2021  2023  2022 
 
  
  Per
        Per        Per
        Per 
 Income  Shares  Share  Income  Shares  Share  Income  Shares  Share  Income  Shares  Share 
Basic EPS:                                    
Numerator                                    
Net income attributable to Turning Point Brands, Inc. $27,958        $40,605        $17,522        $16,422       
                                        
Denominator                                        
Weighted average      18,021,554  $1.55       18,988,435  $2.14       17,556,030  $1.00       18,159,940  $0.90 
                                                
Diluted EPS:                                                
Numerator                                                
Net income attributable to Turning Point Brands, Inc. $27,958          $40,605          $17,522          $16,422         
Interest expense related to Convertible Senior Notes  3,162           3,162           1,800           2,108         
Diluted net income attributable to Turning Point Brands. Inc. $31,120          $43,767          $19,322          $18,530         
                                                
Denominator                                                
Basic weighted average      18,021,554           18,988,435           17,556,030           18,159,940     
Convertible Senior Notes      3,213,589           3,207,293           2,799,434           3,211,484     
Stock options      166,342           268,814     
Stock options and restricted stock units
      183,483           231,689     
      21,401,485  $1.45       22,464,542  $1.95       20,538,947  $0.94       21,603,113  $0.86 

Note 17.16. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has three 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 ProductsCreative 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 StatesU.S. and Canada while products in the NewGen ProductsCreative 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 three 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 $1.0 million and $3.0 million of costs for the three and nine months ended September 30, 2021 previously reported in the NewGenProducts 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.

The tables below present financial information about reported segments:


 
Three Months Ended
June 30,
 

 
Three Months Ended
September 30,
  2023  2022 
 2022  2021       
Net sales            
Zig-Zag products $52,061  $42,234  $46,722  $46,226 
Stoker’s products  33,525   30,472   36,056   33,588 
NewGen products  22,216   37,198 
Total Zig-Zag and Stoker’s products
 $
82,778  $
79,814 
Creative Distribution Solutions
  22,817   23,111 
Total $107,802  $109,904  $105,595  $102,925 
                
Gross profit                
Zig-Zag products $28,035  $23,703  $26,422  $26,430 
Stoker’s products  18,279   17,104   19,968   18,079 
NewGen products  6,398   13,462 
Total Zig-Zag and Stoker’s products
 $
46,390  $
44,509 
Creative Distribution Solutions  6,088   6,960 
Total $52,712  $54,269  $52,478  $51,469 
                
Operating income (loss)                
Zig-Zag products $18,740  $17,122  $17,000  $18,503 
Stoker’s products  13,653   13,305   15,110   13,378 
NewGen products  142   2,027 
Corporate unallocated (1)(2)
  (12,714)  (10,079)  (12,025)  (14,287)
Total Zig-Zag and Stoker’s products $
20,085  $
17,594 
Creative Distribution Solutions
  460   552 
Total $19,821  $22,375  $20,545  $18,146 
                
Interest expense, net  4,802   5,397   4,019   5,144 
Investment income
  (75)  (157)
Investment loss
  4,080   6,227 
Gain on extinguishment of debt  -   (375)  (600)  - 
                
Income before income taxes $15,094  $17,510  $13,046  $6,775 
                
Capital expenditures                
Zig-Zag products $29  $12  $112  $2,237 
Stoker’s products  940   2,209   446   670 
NewGen products  -   2 
Total Zig-Zag and Stoker’s products
 $
558  $
2,907 
Creative Distribution Solutions  -   - 
Total $969  $2,223  $558  $2,907 
                
Depreciation and amortization                
Zig-Zag products $124  $90  $267  $93 
Stoker’s products  738   638   709   770 
NewGen products  453   516 
Total Zig-Zag and Stoker’s products
 $
976  $
863 
Creative Distribution Solutions  554   472 
Total $1,315  $1,244  $1,530  $1,335 


(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes costs related to PMTA of $1.2$0.7 million in 20222023 and $1.0$2.0 million in 2021.2022.


 
Six Months Ended
June 30,
 

 
Nine Months Ended
September 30,
  2023  2022 
 2022  2021       
Net sales            
Zig-Zag products $143,959  $130,440  $88,609  $91,898 
Stoker’s products  98,816   93,096   69,718   65,291 
NewGen products  68,846   116,652 
Total Zig-Zag and Stoker’s products
 $
158,327  $
157,189 
Creative Distribution Solutions  48,224   46,630 
Total $311,621  $340,188  $206,551  $203,819 
                
Gross profit                
Zig-Zag products $80,808  $76,342  $48,812  $52,773 
Stoker’s products  54,044   51,142   39,433   35,765 
NewGen products  21,123   40,019 
Total Zig-Zag and Stoker’s products
 $
88,245  $
88,538 
Creative Distribution Solutions  12,850   14,725 
Total $155,975  $167,503  $101,095  $103,263 
                
Operating income (loss)                
Zig-Zag products $55,980  $57,897  $30,641  $37,240 
Stoker’s products  40,536   39,386   29,672   26,883 
NewGen products  1,372   5,690 
Corporate unallocated (1)(2)
  (40,692)  (31,370)  (22,647)  (27,978)
Total Zig-Zag and Stoker’s products $
37,666  $
36,145 
Creative Distribution Solutions  721   1,230 
Total $57,196  $71,603  $38,387  $37,375 
                
Interest expense, net  15,142   15,406   8,029   10,340 
Investment loss (income)  6,074   (292)
Loss on extinguishment of debt  -   5,331 
Investment loss
  8,879   6,149 
Gain on extinguishment of debt  (1,377)  - 
                
Income before income taxes $35,980  $51,158  $22,856  $20,886 
                
Capital expenditures                
Zig-Zag products $4,588  $110  $1,085  $4,560 
Stoker’s products  2,074   4,226   1,908   1,134 
NewGen products  -   55 
Total Zig-Zag and Stoker’s products $
2,993  $
5,694 
Creative Distribution Solutions
  -   - 
Total $6,662  $4,391  $2,993  $5,694 
                
Depreciation and amortization                
Zig-Zag products $309  $297  $534  $185 
Stoker’s products  2,275   1,901   1,415   1,537 
NewGen products  1,400   1,546 
Total Zig-Zag and Stoker’s products
 $
1,949  $
1,722 
Creative Distribution Solutions
  1,128   947 
Total $3,984  $3,744  $3,077  $2,669 


(1)
Includes corporate costs that are not allocated to any of the three reportable segmentssegments..
(2)
Includes costs related to PMTA of $4.30.8 million in 20222023 and $1.9$3.1 million in 2021.2022.

 September 30,   December 31,  June 30,  December 31, 

 2022  2021  2023  2022 
Assets            
Zig-Zag products $232,677  $227,554  $191,672  $225,893 
Stoker’s products  181,333   142,334   168,326   151,241 
NewGen products  54,818   72,746 
Corporate unallocated (1)
  130,961   158,926   167,190   155,348 
Total Zig-Zag and Stoker’s products $
527,188  $
532,482 
Creative Distribution Solutions
  32,486   39,624 
Total $599,789  $601,560  $559,674  $572,106 


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


 NewGen Segment  
Creative Distribution
Solutions Segment
 
 Three Months Ended  Three Months Ended 
 September 30,  June 30, 
 2022  2021  2023  2022 
Business to Business $18,226  $27,169  $20,038  $17,674 
Business to Consumer - Online  3,884   9,959   2,525   5,336 
Other  106   70   254   101 
Total $22,216  $37,198  $22,817  $23,111 


 NewGen Segment  
Creative Distribution
Solutions Segment
 
 Nine Months Ended  Six Months Ended 
 September 30,  June 30, 
 2022  2021  2023  2022 
Business to Business $55,024  $85,141  $42,531  $36,798 
Business to Consumer - Online  13,453   31,255   5,335   9,569 
Other  369   256   358   263 
Total $68,846  $116,652  $48,224  $46,630 

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 

 September 30,  June 30, 
 2022  2021  2023  2022 
Domestic $98,173  $102,255  $98,121  $95,442 
Foreign  9,629   7,649   7,474   7,483 
Total $107,802  $109,904  $105,595  $102,925 

 Nine Months Ended  Six Months Ended 

 September 30,  June 30, 
 2022  2021  2023  2022 
Domestic $287,381  $318,166  $191,981  $189,208 
Foreign  24,240   22,022   14,570   14,611 
Total $311,621  $340,188  $206,551  $203,819 

Note 17. Additional Information with Respect to Unrestricted Subsidiary

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 “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 June 30, 2023 and 2022 (unaudited):

  Three Months Ended June 30 
  2023
  2022 
  
Company and
Restricted
Subsidiaries
  
Unrestricted
Subsidiaries
  Consolidated  
Company and
Restricted
Subsidiaries
  
Unrestricted
Subsidiaries
  Consolidated 
Net sales $82,778  $22,817  $105,595  $79,814  $23,111  $102,925 
Cost of sales  36,388   16,729   53,117   35,305   16,151   51,456 
Gross profit  46,390   6,088   52,478   44,509   6,960   51,469 
Selling, general, and administrative expenses  26,305   5,628   31,933   26,915   6,408   33,323 
Operating income  20,085   460   20,545   17,594   552   18,146 
Interest expense, net  4,019   -   4,019   5,144   -   5,144 
Investment loss
  4,080   -   4,080   6,227   -   6,227 
Gain on extinguishment of debt  (600)  -   (600)  -   -   - 
Income before income taxes  12,586   460   13,046   6,223   552   6,775 
Income tax expense  3,220   118   3,338   1,441   128   1,569 
Consolidated net income  9,366   342   9,708   4,782   424   5,206 
Net loss attributable to non-controlling interest  (217)  -   (217)  (218)  -   (218)
Net income attributable to Turning Point Brands, Inc. $9,583  $342  $9,925  $5,000  $424  $5,424 

Income Statement for the Six Months Ended June 30, 2023 and 2022 (unaudited):

  Six Months Ended June 30 
  2023  2022 
  
Company and
Restricted
Subsidiaries
  Unrestricted Subsidiaries  Consolidated  
Company and
Restricted
Subsidiaries
  Unrestricted Subsidiaries  Consolidated 
                   
Net sales $158,327  $48,224  $206,551  $157,189  $46,630  $203,819 
Cost of sales  70,082   35,374   105,456   68,651   31,905   100,556 
Gross profit  88,245   12,850   101,095   88,538   14,725   103,263 
Selling, general, and administrative expenses  50,579   12,129   62,708   52,393   13,495   65,888 
Operating income  37,666   721   38,387   36,145   1,230   37,375 
Interest expense, net  8,029   -   8,029   10,340   -   10,340 
Investment loss  8,879   -   8,879   6,149   -   6,149 
Gain on extinguishment of debt  (1,377)  -   (1,377)  -   -   - 
Income before income taxes  22,135   721   22,856   19,656   1,230   20,886 
Income tax expense  5,623   183   5,806   4,620   289   4,909 
Consolidated net income  16,512   538   17,050   15,036   941   15,977 
Net loss attributable to non-controlling interest  (472)  -   (472)  (445)  -   (445)
Net income attributable to Turning Point Brands, Inc. $16,984  $538  $17,522  $15,481  $941  $16,422 

Balance Sheet as of June 30, 2023 (unaudited):

ASSETS 
Company and
Restricted
Subsidiaries
  
Unrestricted
Subsidiaries
  Eliminations  Consolidated 
Current assets:            
Cash $96,701  $3,806  $
-  $100,507 
Accounts receivable, net  7,550   370   -   7,920 
Inventories  115,646   9,410   -   125,056 
Other current assets  15,103   3,113   -   18,216 
Total current assets  235,000   16,699   -   251,699 
Property, plant, and equipment, net  23,808   320   -   24,128 
Deferred income taxes  7,966   -   -   7,966 
Right of use assets  10,888   35   -   10,923 
Deferred financing costs, net  229   -   -   229 
Goodwill  136,244   -   -   136,244 
Other intangible assets, net  66,646   15,402   -   82,048 
Master Settlement Agreement (MSA) escrow deposits  28,229   -   -   28,229 
Other assets  18,178   30   -   18,208 
Investment in unrestricted subsidiaries
  51,836
   -   (51,836)  - 
Total assets $579,024  $32,486  $
(51,836) $559,674 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable $9,449  $1,353  $
-  $10,802 
Accrued liabilities  29,018   1,880   -   30,898 
Other current liabilities  5   -   -   5 
Total current liabilities  38,472   3,233   -   41,705 
Notes payable and long-term debt  379,195   -   -   379,195 
Lease liabilities  9,528   -   -   9,528 
Total liabilities  427,195   3,233   -   430,428 
                 
Commitments and contingencies            
                 
Stockholders’ equity:                
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries
  150,653   29,253   (51,836)  128,070 
Non-controlling interest  1,176   -   -   1,176 
Total stockholders’ equity  151,829   29,253   (51,836)  129,246 
Total liabilities and stockholders’ equity $579,024  $32,486  $
(51,836) $559,674 

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 RepurchaseRepurchases

The most recentA dividend of $0.06$0.065 per common share was paid on OctoberJuly 7, 2022,2023, to shareholders of record at the close of business on SeptemberJune 16, 2022.2023.

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 approved share repurchase program by $24.6 million. The program is subject to the ongoing discretion of the Board. The total numberBoard of shares repurchased forDirectors. On October 25, 2021, the threeBoard months ended September of Directors30, increased the approved share repurchase program by $30.7 million and by an additional $24.6 million on February 24, 2022 was, in each case bringing the aggregate approval back to $50.0 million. 307,207 shares for a total cost of $7.627.2 million and an average price per share of $24.78.$29.4 million remains available for share repurchases under the program at September June 30,2022. In addition, from time to time, the Company’s Board of Directors may authorize the repurchase of the Company’s debt securities, including the Senior Secured Notes and Convertible Senior Notes. 2023.

Item 2.Management’s2.  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 discussionManagement’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 enable the reader to understand the Company’s financial condition and results of operations, including any material changes in the Company’s financial condition and results of operations since December 31, 2022, and as compared with the three and six months ended June 30, 2022.  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 yearthree-year period ending 2021ended 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, ourOur products are currently available in approximately 195,000197,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 215,000217,000 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 fourth 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 its own Board of Directors. During the first quarter of 2023, the business was designated 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.

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 ProductsCreative 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.

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;
Cost and increasing regulation of promotional and advertising activities;
General economic conditions, including consumer access to disposable income and other conditions affecting purchasing power such as inflation;
Supply chain challengesLabor and freightproduction costs;
Price sensitivity in our end-markets;
Cost and increasing regulation of promotional and advertising activities;
Cost of complying with regulation, including the “deeming regulation”;
Increasing and unpredictable regulation of NewGenCreative 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.

Recent Developments

Leadership Transition

In October 2022, Graham A. Purdy, the Company’s former Chief Operating Officer, was appointed as President and Chief Executive Officer of the Company and as a member of the Board upon the resignation of Yavor Efremov as the Company’s president and CEO and a member of the Board of Directors. In connection with Mr. Efremov’s termination of employment he is eligible to receive severance benefits as set forth in his employment agreement. We expect to take a charge of approximately $2.2 million in the fourth quarter 2022 for the severance benefits.

In connection with Mr. Purdy’s appointment and Mr. Efremov’s departure, David Glazek, current non-executive Chair of the Board, will transition to the role of Executive Chair effective January 2023.  Mr. Purdy will be the Company’s principal executive officer.  The Company expects to appoint a lead independent director at the time Mr. Glazek becomes the Company’s Executive Chair.

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 took 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, companies with NTN Products in the market between March 15, 2022, and April 14, 2022, were required to 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, 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. We submitted premarket filings for certain of our NTN Products prior to the May 14, 2022, deadline. While these applications remain under review, 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 20212022 Annual Report on Form 10-K.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that impact the Company.

Results of Operations

Comparison of the Three Months Ended SeptemberJune 30, 2022,2023, to the Three Months Ended SeptemberJune 30, 20212022

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

 Three Months Ended September 30,  Three Months Ended June 30, 
 2022 2021 % Change  2023 2022 % Change 
Consolidated Results of Operations Data:              
Net sales              
Zig-Zag products $52,061 
$
42,234
 23.3% $46,722  $46,226   1.1%
Stoker's products 33,525 
30,472
 10.0%
NewGen products  22,216  
37,198
 -40.3%
Stoker’s products  36,056   33,588   7.3%
Total Zig-Zag and Stoker’s products  82,778   79,814   3.7%
Creative Distribution Solutions  22,817   23,111   -1.3%
Total net sales 107,802 109,904 -1.9%  105,595   102,925   2.6%
Cost of sales  55,090  55,635 -1.0%  53,117   51,456   3.2%
Gross profit                   
Zig-Zag products 28,035 23,703 18.3%  26,422   26,430   0.0%
Stoker's products 18,279 17,104 6.9%
NewGen products  6,398  13,462 -52.5%
Stoker’s products  19,968   18,079   10.4%
Total Zig-Zag and Stoker’s products  46,390   44,509   4.2%
Creative Distribution Solutions  6,088   6,960   -12.5%
Total gross profit 52,712 54,269 -2.9%  52,478   51,469   2.0%
                   
Selling, general, and administrative expenses  32,891  31,894 3.1%  31,933   33,323   -4.2%
Operating income 19,821 22,375 -11.4%  20,545   18,146   13.2%
Interest expense, net 4,802 5,397 -11.0%  4,019   5,144   -21.9%
Investment income (75) (157) -52.2%
Investment loss  4,080   6,227   -34.5%
Gain on extinguishment of debt  -  (375) -100.0%  (600)  - NM 
Income before income taxes 15,094 17,510 -13.8%  13,046   6,775   92.6%
Income tax expense  3,797  4,073 -6.8%  3,338   1,569   112.7%
Consolidated net income 11,297 13,437 -15.9%  9,708   5,206   86.5%
Net loss attributable to non-controlling interest  (239)  (31) 671.0%  (217)  (218)  -0.5%
Net income attributable to Turning Point Brands, Inc. $11,536 $13,468 -14.3% $9,925  $5,424   83.0%

Net Sales:  For the three months ended SeptemberJune 30, 2022,2023, consolidated net sales decreasedincreased to $107.8$105.6 million from $109.9$102.9 million for the three months ended SeptemberJune 30, 2021, a decrease2022, an increase of $2.1$2.7 million or 1.9%2.6%. The decrease in net sales was primarily driven by decreased sales volume in the NewGen Products segment.

For the three months ended SeptemberJune 30, 2022,2023, net sales in the Zig-Zag Products segment increased to $52.1$46.7 million from $42.2$46.2 million for the three months ended SeptemberJune 30, 2021,2022, an increase of $9.8$0.5 million or 23.3%1.1%. ForThe increase in net sales was driven by strong growth in our Canadian and other smoking accessories businesses partially offset by declines in the three months ended September 30, 2022, volume increased 21.7% and price/mix increased 1.6%. Our U.S. rolling papers business grew double-digits, primarily through our e-commerce channels.  Continued strength in paper cones, strong receptivity to promotional programs, the launch of CLIPPER lighters, and timing shifts in Canadian deliveries contributed to strong performance during the quarter. In total, we believe approximately $5 million of sales were pulled forward from the fourth quarter across the Zig Zag Products segment.wraps businesses.

For the three months ended SeptemberJune 30, 2022,2023, net sales in the Stoker’s Products segment increased to $33.5$36.1 million from $30.5$33.6 million for the three months ended SeptemberJune 30, 2021,2022, an increase of $3.1$2.5 million or 10%7.3%. For the three months ended SeptemberJune 30, 2022,2023, volume increased 2.4%0.7% and price/product mix increased 7.6%6.6%. The increase in net sales was driven by double-digit growth of Stoker’s® MST partially offset by a mid-single digit decline in loose-leaf chewing tobacco. FRE nicotine pouch products was a marginal contributor to segment sales.

For the three months ended SeptemberJune 30, 2022,2023, net sales in the NewGen productsCreative Distribution Solutions segment decreased to $22.2$22.8 million from $37.2$23.1 million for the three months ended SeptemberJune 30, 2021,2022, a decrease of $15.0$0.3 million or 40.3%1.3%. The decrease in net sales was primarily the result of declineslower volumes in the vape distribution businesses which continues to be impacted by the regulatory environment.  Net sales have been relatively steady sequentially within the current year period.businesses.

Gross Profit:  For the three months ended SeptemberJune 30, 2022,2023, consolidated gross profit decreasedincreased to $52.7$52.5 million from $54.3$51.5 million for the three months ended SeptemberJune 30, 2021, a decrease of $1.6 million or 2.9%. Gross profit as a percentage of revenue decreased to 48.9% for the three months ended September 30, 2022, compared to 49.4% for the three months ended September 30, 2021 driven by mix.

For the three months ended September 30, 2022, gross profit in the Zig-Zag Products segment increased to $28.0 million from $23.7 million for the three months ended September 30, 2021, an increase of $4.3$1.0 million or 18.3%2.0%. Gross profit as a percentage of net sales decreased to 53.9%49.7% for the three months ended June 30, 2023, compared to 50.0% for the three months ended June 30, 2022 driven by increased margin in the Stoker’s Products segment offset by decreased margin in the Zig-Zag Products and Creative Distribution Solutions segments as a result of price/product mix.

For the three months ended June 30, 2023, gross profit in the Zig-Zag Products segment remained unchanged at $26.4 million compared to the three months ended June 30, 2022. Gross profit as a percentage of net sales decreased to 56.6% of net sales for the three months ended SeptemberJune 30, 2022,2023, from 56.1%57.2% of net sales for the three months ended SeptemberJune 30, 2021, as a result of strong growth in lower gross margin products including the launch of our lighters business.2022, driven primarily by product mix.

For the three months ended SeptemberJune 30, 2022,2023, gross profit in the Stoker’s Products segment increased to $18.3$20.0 million from $17.1$18.1 million for the three months ended SeptemberJune 30, 2021,2022, an increase of $1.2$1.9 million or 6.9%10.4%. Gross profit as a percentage of net sales increased to 55.4% of net sales for the three months ended June 30, 2023, from 53.8% of net sales for the three months ended June 30, 2022, primarily as a result of strong market share and pricing gains in MST.

For the three months ended June 30, 2023, gross profit in the Creative Distribution Solutions segment decreased to $6.1 million from $7.0 million for the three months ended June 30, 2022, a decrease of $0.9 million or 12.5%. Gross profit as a percentage of net sales decreased to 54.5%26.7% of net sales for the three months ended SeptemberJune 30, 2022,2023, from 56.1%30.1% of net sales for the three months ended SeptemberJune 30, 2021, primarily as a result of the mix impact of FRE and stronger growth in discount looseleaf products.

For the three months ended September 30, 2022, gross profit in the NewGen products segment decreased to $6.4 million from $13.5 million for the three months ended September 30, 2021, a decrease of $7.1 million or 52.5%. Gross profit as a percentage of net sales decreased to 28.8% of net sales for the three months ended September 30, 2022, from 36.2% of net sales for the three months ended September 30, 2021, primarily as a result of product mix and the competitive environment.mix.

Selling, General, and Administrative Expenses:  For the three months ended SeptemberJune 30, 2022,2023, selling, general, and administrative expenses increaseddecreased to $32.9$31.9 million from $31.9$33.3 million for the three months ended SeptemberJune 30, 2021, an increase2022, a decrease of $1.0$1.4 million or 3.1%4.2%. Selling, general and administrative expenses in the three months ended SeptemberJune 30, 2022,2023, included $1.4$2.1 million of stock options, restricted stock and incentives expense, $1.2$0.7 million of expense related to PMTA, and $0.4$0.1 million of consultingtransaction costs and $0.1 million of expense related to the scoping and mobilization of the new ERP and CRM systems. Selling, general and administrative expenses in the three months ended SeptemberJune 30, 2021,2022, included $1.8$1.5 million of stock option, restricted stock and incentives expense, $0.2$0.4 million of transaction income and $1.0costs, $2.0 million of expense related to PMTA.PMTA, $0.3 million of expense related to corporate restructuring and $0.9 million of consulting expense related to the scoping of the new ERP and CRM systems.

Interest Expense, net:  For the three months ended SeptemberJune 30, 2022,2023, interest expense, net decreased to $4.8$4.0 million from $5.4$5.1 million for the three months ended SeptemberJune 30, 20212022 as a result of the repaymentrepurchase of the Promissory Note and forgiveness$39.0 million of the Unsecured Loan each discussed in Note 11Convertible Senior Notes Payable and Long-Term Debt in the Consolidated Financial Statements.  In additionfourth quarter of 2022 and the first half of 2023, and increased interest income earned on our cash balance offsetas a result of rising interest expense.rates.

Investment Income:Loss:  For the three months ended SeptemberJune 30, 2022,2023, investment incomeloss decreased to $0.1$4.1 million compared to $0.2a $6.2 million of investment incomeloss for the three months ended SeptemberJune 30, 2021.2022. The change is a result of the impairment charge recognized on our investment in Docklight for $3.7 million in the second quarter 2023 compared to an impairment charge of $6.3 million in the second quarter of 2022 related to our investment in Dosist.

Gain on Extinguishment of DebtDebt: There was a gain on extinguishment of debt of $0.6 million for the three months ended June 30, 2023 as a result of repurchasing $15.1 million of Convertible Senior Notes compared to no gain on extinguishment of debt for the three months ended SeptemberJune 30, 2022 compared to $0.4 million for the three months ended September 30, 2021 related to the repayment of the Promissory Note.2022.

Income Tax Expense:  Our income tax expense of $3.8$3.3 million was 25.2%25.6% of income before income taxes for the three months ended SeptemberJune 30, 2022 and included a discrete tax benefit of $0.0 million relating to stock option exercises.2023. Our effective income tax rate was 23.3%23.2% for the three months ended SeptemberJune 30, 20212022 and included a discrete tax benefit $1.0$0.3 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest:  Net loss attributable to non-controlling interest was $0.2 million for the three months ended SeptemberJune 30, 20222023 compared to $0.0$0.2 million for the three months ended SeptemberJune 30, 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 SeptemberJune 30, 2023 and 2022, and 2021, was $11.5$9.9 million and $13.5$5.4 million, respectively.

Comparison of the NineSix Months Ended SeptemberJune 30, 2022,2023, to the NineSix Months Ended SeptemberJune 30, 20212022

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

 Nine Months Ended September 30,  Six Months Ended June 30, 
 2022 2021 % Change  2023 2022 % Change 
Consolidated Results of Operations Data:              
Net sales              
Zig-Zag products $143,959 
$
130,440
 10.4% $88,609 $91,898 -3.6%
Stoker's products 98,816 
93,096
 6.1%
NewGen products  68,846  
116,652
 -41.0%
Stoker’s products  69,718  65,291 6.8%
Total Zig-Zag and Stoker’s products 158,327 157,189 0.7%
Creative Distribution Solutions  48,224  46,630 3.4%
Total net sales 311,621 340,188 -8.4% 206,551 203,819 1.3%
Cost of sales  155,646  172,685 -9.9%  105,456  100,556 4.9%
Gross profit              
Zig-Zag products 80,808 76,342 5.8% 48,812 52,773 -7.5%
Stoker's products 54,044 51,142 5.7%
NewGen products  21,123  40,019 -47.2%
Stoker’s products  39,433  35,765 10.3%
Total Zig-Zag and Stoker’s products 88,245 88,538 -0.3%
Creative Distribution Solutions  12,850  14,725 -12.7%
Total gross profit 155,975 167,503 -6.9% 101,095 103,263 -2.1%
              
Selling, general, and administrative expenses  98,779  95,900 3.0%  62,708  65,888 -4.8%
Operating income 57,196 71,603 -20.1% 38,387 37,375 2.7%
Interest expense, net 15,142 15,406 -1.7% 8,029 10,340 -22.4%
Investment loss (income) 6,074 (292) -2180.1%
Loss on extinguishment of debt  -  5,331 -100.0%
Investment loss 8,879 6,149 44.4%
Gain on extinguishment of debt  (1,377)  - NM 
Income before income taxes 35,980 51,158 -29.7% 22,856 20,886 9.4%
Income tax expense  8,706  11,151 -21.9%  5,806  4,909 18.3%
Consolidated net income 27,274 40,007 -31.8% 17,050 15,977 6.7%
Net loss attributable to non-controlling interest  (684)  (598) 14.4%  (472)  (445) 6.1%
Net income attributable to Turning Point Brands, Inc. $27,958 $40,605 -31.1% $17,522 $16,422 6.7%

Net Sales:  For the ninesix months ended SeptemberJune 30, 2022,2023, consolidated net sales decreasedincreased to $311.6$206.6 million from $340.2$203.8 million for the ninesix months ended SeptemberJune 30, 2021,2022, an increase of $2.7 million or 1.3%.

For the six months ended June 30, 2023, net sales in the Zig-Zag Products segment decreased to $88.6 million from $91.9 million for the six months ended June 30, 2022, a decrease of $28.6$3.3 million or 8.4%3.6%. The decrease in net sales was driven by decreased sales volumeanticipated declines in the NewGen Products segment.U.S. rolling papers and wraps businesses which were impacted by reduction of trade inventory during the period, offset by growth in our Canadian and other smoking accessories businesses.

For the ninesix months ended SeptemberJune 30, 2022,2023, net sales in the Zig-ZagStoker’s Products segment increased to $144.0$69.7 million from $130.4$65.3 million for the ninesix months ended SeptemberJune 30, 2021,2022, an increase of $13.5$4.4 million or 10.4%6.8%. For the ninesix months ended SeptemberJune 30, 2022,2023, volume increased 8.4%0.4% and price/product mix increased 2.0%6.4%. The increase in net sales was driven by double-digit growth in U.S. rolling papers primarily through our e-commerce channels.  Continued strength in paper cones, strong receptivity to promotional programs, the launch of CLIPPER lighters, and timing shifts in Canadian deliveries contributed to strong performance during the quarter. In total, we believe approximately $5 million of sales were pulled forward from the fourth quarter across the Zig Zag Products segment. However, these increases were offset by declines in the cigar wraps business driven partially by a trade inventory reduction in the current period compared with a trade inventory load in the prior year period.Stoker’s® MST.

For the ninesix months ended SeptemberJune 30, 2022,2023, net sales in the Stoker’s ProductsCreative Distribution Solutions segment increased to $98.8$48.2 million from $93.1$46.6 million for the ninesix months ended SeptemberJune 30, 2021,2022, an increase of $5.7$1.6 million or 6.1%. For the nine months ended September 30, 2022, volume decreased 1.4% and price/mix increased 7.5%3.4%. The increase in net sales was driven by double digit growth of Stoker’s® MST partially offset by a mid-single digit decline in loose-leaf chewing tobacco. FRE nicotine pouch products was a marginal contributor to segment sales.

For the nine months ended September 30, 2022, net sales in the NewGen products segment decreased to $68.8 million from $116.7 million for the nine months ended September 30, 2021, a decrease of $47.8 million or 41.0%. The decrease in net sales was primarily the result of declinesimproved volumes in the vape distribution businesses which continue to be impacted by the regulatory environment.businesses.

Gross Profit:  For the ninesix months ended SeptemberJune 30, 2022,2023, consolidated gross profit decreased to $156.0$101.1 million from $167.5$103.3 million for the ninesix months ended SeptemberJune 30, 2021,2022, a decrease of $11.5$2.2 million or 6.9%. Gross profit as a percentage of revenue increased to 50.1% for the nine months ended September 30, 2022, compared to 49.2% for the nine months ended September 30, 2021 driven by mix as the NewGen Products segment generates lower margins.

For the nine months ended September 30, 2022, gross profit in the Zig-Zag Products segment increased to $80.8 million from $76.3 million for the nine months ended September 30, 2021, an increase of $4.5 million or 5.8%2.1%. Gross profit as a percentage of net sales decreased to 56.1% of net sales48.9% for the ninesix months ended SeptemberJune 30, 2023, compared to 50.7% for the six months ended June 30, 2022 from 58.5% of net sales for the nine months ended September 30, 2021, as a result of strong growth in lower grossdriven by increased margin products including the launch of our lighters business.

For the nine months ended September 30, 2022, gross profit in the Stoker’s Products segment increasedoffset by decreased margin in the Zig-Zag Products and Creative Distribution Solutions segments as a result of product mix.

For the six months ended June 30, 2023, gross profit in the Zig-Zag Products segment decreased to $54.0$48.8 million from $51.1$52.8 million for the ninesix months ended SeptemberJune 30, 2022, an increasea decrease of $2.9$4.0 million or 5.7%7.5%. Gross profit as a percentage of net sales decreased to 54.7%55.1% of net sales for the ninesix months ended SeptemberJune 30, 2022,2023, from 54.9%57.4% of net sales for the ninesix months ended SeptemberJune 30, 2021.2022, as a result of product mix including the decline in net sales of higher margin U.S. rolling paper and wraps products and contribution of CLIPPER lighters, as a result of the exclusive distribution deal entered into in February, 2022, which operates at lower gross profit margins.

For the ninesix months ended SeptemberJune 30, 2022,2023, gross profit in the NewGen productsStoker’s Products segment increased to $39.4 million from $35.8 million for the six months ended June 30, 2022, an increase of $3.7 million or 10.3%. Gross profit as a percentage of net sales increased to 56.6% of net sales for the six months ended June 30, 2023, from 54.8% of net sales for the six months ended June 30, 2022, primarily as a result of the strong incremental margin contribution of MST.

For the six months ended June 30, 2023, gross profit in the Creative Distribution Solutions segment decreased to $21.1$12.9 million from $40.0$14.7 million for the ninesix months ended SeptemberJune 30, 2021,2022, a decrease of $19.0$1.9 million or 47.2%12.7%. Gross profit as a percentage of net sales decreased to 30.7%26.6% of net sales for the ninesix months ended SeptemberJune 30, 2022,2023, from 34.3%31.6% of net sales for the ninesix months ended SeptemberJune 30, 2021,2022, primarily as a result of product mix and the competitive environment.mix.

Selling, General, and Administrative Expenses:  For the ninesix months ended SeptemberJune 30, 2022,2023, selling, general, and administrative expenses increaseddecreased to $98.8$62.7 million from $95.9$65.9 million for the ninesix months ended SeptemberJune 30, 2021, an increase2022, a decrease of $2.9$3.2 million or 3.0%4.8%. Selling, general and administrative expenses forin the ninesix months ended SeptemberJune 30, 2022,2023, included $4.1$2.8 million of stock options, restricted stock and incentives expense, $0.8 million of expense related to PMTA, $0.3 million of expense related to the new ERP and CRM systems and $0.1 million related to transaction costs. Selling, general and administrative expenses in the six months ended June 30, 2022, included $2.7 million of stock option, restricted stock and incentives expense, $4.3$0.8 million of transaction costs, $3.1 million of expense related to PMTA, $1.6 million of expense related to corporate restructuring and $1.6$1.2 million of consulting expense related to the scoping and mobilization of the new ERP and CRM systems. Selling, general and administrative expenses in the nine months ended September 30, 2021, included $6.0 million of stock option, restricted stock and incentives expense (including $1.1 million for accelerated vesting of options for a departing executive), $1.1 million of transaction costs and $1.9 million of expense related to PMTA.

Interest Expense, net:  For the ninesix months ended SeptemberJune 30, 2022,2023, interest expense, net decreased to $15.1$8.0 million, from $15.4$10.3 million for the ninesix months ended SeptemberJune 30, 20212022 as a result of the increaserepurchases of $39.0 million of Convertible Senior Notes in the Company’s outstanding debt in February 2021 offset byfourth quarter of 2022 and the first and second quarters of 2023, and increased interest earnedincome on our cash balance.as a result of rising interest rates.

Investment Loss (Income):Loss:  For the ninesix months ended SeptemberJune 30, 2022,2023, investment loss increased to $6.1$8.9 million compared to $0.3$6.1 million of investment income for the ninesix months ended SeptemberJune 30, 2021, primarily as2022.  The change is a result of $6.3 millionthe impairment ofcharge recognized on our investment in dosist.  See Note 9 Other AssetsDocklight for $6.5 million in the Consolidated Financial Statements for information onfirst half of 2023 compared to an impairment charge of $6.3 million in the dosist impairment.second quarter of 2022 related to our investment in Dosist.

LossGain on Extinguishment of Debt: There was a gain on extinguishment of debt of $1.4 million for the six months ended June 30, 2023 as a result of repurchasing $29.0 million of Convertible Senior Notes during the first and second quarters of 2023 compared to no lossgain on extinguishment of debt for the ninesix months ended SeptemberJune 30, 2022 compared to $5.3 million for the nine months ended September 30, 2021 related to the repayment of the 2018 First Lien Credit Facility.2022.

Income Tax Expense:  Our income tax expense of $8.7$5.8 million was 24.2%25.4% of income before income taxes for the ninesix months ended SeptemberJune 30, 2022 and included a discrete tax benefit of $0.7 million relating to stock option exercises.2023. Our effective income tax rate was 21.8%23.5% for the ninesix months ended SeptemberJune 30, 20212022 and included a discrete tax benefit $6.2$0.7 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest:  Net loss attributable to non-controlling interest was $0.7$0.5 million for the ninesix months ended SeptemberJune 30, 20222023 compared to $0.6$0.4 million for the ninesix months ended SeptemberJune 30, 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 ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, was $28.0$17.5 million and $40.6$16.4 million, respectively.

EBITDA and Adjusted EBITDA

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

We define “EBITDA” as net income before interest expense, net, gain (loss) on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define “Adjusted EBITDA” as net income before interest expense, net, 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 
(in thousands) September 30,   
Three Months Ended
June 30,
  
 2022 2021  2023 2022 
Net income attributable to Turning Point Brands, Inc. $11,536 $13,468  $9,925 $5,424 
Add:          
Interest expense, net 4,802 5,397  4,019 5,144 
Gain on extinguishment of debt - (375) (600) - 
Income tax expense 3,797 4,073  3,338 1,569 
Depreciation expense 861 767  759 879 
Amortization expense  454  477   771  456 
EBITDA $21,450 $23,807  $18,212 $13,472 
Components of Adjusted EBITDA          
Corporate restructuring (a) 17 -  - 270 
ERP/CRM (b) 435 -  138 861 
Stock options, restricted stock, and incentives expense (c) 1,442 1,752  2,093 1,502 
Transactional expenses (d) - (232) 82 364 
FDA PMTA (e)  1,169  960  662 1,957 
Non-cash asset impairment (f)  4,092  6,300 
Adjusted EBITDA $24,513 $26,287  $25,279 $24,726 


(a)Represents costs associated with corporate restructuring, including severance.
(b)Represents cost associated with scoping and mobilization of new ERP and CRM 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"(“PMTA”).
(f)Represents impairment of investment assets.

 Nine Months Ended 
(in thousands) September 30,   
Six Months Ended
June 30,
  
 2022 2021  2023 2022 
Net income attributable to Turning Point Brands, Inc. $27,958 $40,605  $17,522 $16,422 
Add:          
Interest expense, net 15,142 15,406  8,029 10,340 
Loss on extinguishment of debt - 5,331 
Gain on extinguishment of debt (1,377) - 
Income tax expense 8,706 11,151  5,806 4,909 
Depreciation expense 2,611 2,313  1,535 1,750 
Amortization expense  1,373  1,431   1,542  919 
EBITDA $55,790 $76,237  $33,057 $34,340 
Components of Adjusted EBITDA          
Corporate restructuring (a) 1,619 -  - 1,602 
ERP/CRM (b) 1,626 -  276 1,191 
Stock options, restricted stock, and incentives expense (c) 4,103 6,015  2,836 2,661 
Transactional expenses (d) 789 1,077  86 789 
FDA PMTA (e) 4,265 960  820 3,096 
Non-cash asset impairment (f)  6,300  -   8,989  6,300 
Adjusted EBITDA $74,492 $84,289  $46,064 $49,979 


(a)Represents costs associated with corporate restructuring, including severance.
(b)Represents cost associatedassosicated with scoping and mobilization of new ERP and CRM 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"(“PMTA”).
(f)Represents impairment of investment in dosist.assets.

Liquidity and Capital ReservesResources

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 SeptemberJune 30, 2022,2023, we had $105.7$100.5 million of cash on hand and have $21.4$23.6 million of availability under the 2021 Revolving Credit Facility. Subsequent to the balance sheet date the Convertible Senior Notes became current in the amount of $133.5 million.  Based on the current liquidity, free cash flow generation and other financing options, we believe there will be adequate liquidity to address the maturity of the Convertible Senior Notes.

Our working capital, which we define as current assets less cash and current liabilities, increased $27.7decreased $0.4 million to $108.2$109.5 million at SeptemberJune 30, 2022,2023, compared with $80.5$109.9 million at December 31, 2021 primarily due to increase in inventory as a result of our annual tobacco purchase.2022.

 As of  As of 
(in thousands) September 30, December 31,   
June 30,
2023
  
December 31,
2022
  
 2022 2021 
          
Current assets $150,110 $120,849  $151,192 $151,251 
Current liabilities  41,881  40,336   41,705  41,376 
Working capital $108,229 $80,513  $109,487 $109,875 

Cash Flows from Operating Activities

For the ninesix months ended SeptemberJune 30, 2022,2023, net cash provided by operating activities was $16.4$27.5 million compared to net cash provided by operating activities of $49.6$7.1 million for the nine six months ended SeptemberJune 30, 2021, a decrease2022, an increase of $33.2$20.4 million, primarily due to lower net income due to decreased sales in the NewGen Segment combined with the timing of changes toof inventory and other working capital, primarily as a result of annual tobacco inventory purchase.capital.

Cash Flows from Investing Activities

For the six nine months ended SeptemberJune 30, 2022,2023, net cash used in investing activities was $17.8$3.0 million compared to net cash used in investing activities of $52.2$15.7 million for the six nine months ended SeptemberJune 30, 2021,2022, a decreasereduction in cash used in investing activities of $34.5$12.7 million, primarily due to the lowera decrease in purchases of investments of $10.7 million in our MSA escrow account as well as no acquisitions and a small investments made in the current year period.account.

Cash Flows from Financing Activities

For the ninesix months ended SeptemberJune 30, 2022,2023, net cash used in financing activities was $31.2$30.4 million compared to net cash provided byused in financing activities of $76.3$22.5 million for the ninesix months ended SeptemberJune 30, 2021, a decrease2022, an increase of $107.5 million. The decrease was$7.9 million, primarily due to an increase$27.4 million in cash used to repurchaserepurchases of Convertible Senior Notes during the period, offset by a decrease in repurchases of common stock of $19.4 million during 2022 while in 2021 the Company received net proceeds received from the Senior Secured Notes partially offset by the repayment in full of the 2018 First Lien Term Loan in the first quarter of 2021.2023.

Dividends and Share and RepurchasesRepurchase

The most recentA dividend of $0.06$0.065 per common share was paid on OctoberJuly 7, 2022,2023, to shareholders of record at the close of business on SeptemberJune 16, 2022.2023.

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. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million. On February 24, 2022, the Board increased the approved share repurchase program by $24.6 million. The program is subject to the ongoing discretion of the Board. The total numberOn October 25, 2021, the Board of shares repurchased forDirectors increased the nine months ended September 30, 2022, was 307,207 shares for a total cost of $7.6approved share repurchase program by $30.7 million and by an average price per share of $24.78. $29.4additional $24.6 million on February 24, 2022. $27.2 million remains available for share repurchases under the program at SeptemberJune 30, 2022.

Subject to market conditions, we will from time to time opportunistically repurchase our Senior Secured Notes and Convertible Senior Notes and any other securities we may have outstanding.

Repurchases of common stock, Senior Secured Notes and Convertible Senior Notes may be made through bilateral transactions, open market transactions, 10b5-1 trading plans or otherwise.2023.

Long-Term Debt

As of SeptemberJune 30, 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 the outstanding balances of our debt instruments.

 September 30, December 31, 
 2022 2021   
June 30,
2023
  
December 31,
2022
  
Senior Secured Notes $250,000 $250,000  $250,000 $250,000 
Convertible Senior Notes  172,500  172,500   133,541  162,500 
Gross notes payable and long-term debt 422,500 422,500  383,541 412,500 
Less deferred finance charges  (6,471)  (8,328)  (4,346)  (5,743)
Notes payable and long-term debt $416,029 $414,172  $379,195 $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. We2021.We used the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

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

The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior toon or after February 15, 2023, at the redemption prices (expressed as a price equal to 100%percentage of the principal amount of the Notes redeemedto 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 SeptemberJune 30, 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.

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”). TheOn May 10, 2023, the Company and certain of its subsidiaries, as guarantors, entered into an amendment (the “Amendment”) to the 2021 Revolving Credit Facility provides for(as amended, the “Amended Revolving Credit Facility”). The Amendment includes certain modifications to the 2021 Revolving Credit Facility relating to the replacement of the London Inter-Bank Offered Rate with a revolving line of credit of upSecured Overnight Financing Rate as the interest rate benchmark under the 2021 Revolving Credit Facility and adjusts certain other provisions to $25.0 million. reflect current documentation standards and other agreed modifications.

Letters of credit are limited to $10$10.0 million (and are a part of, and not in addition to, the revolving line of credit). We have not drawn any borrowings under the 2021Amended Revolving Credit Facility but do have letters of credit of approximately $3.6$1.4 million outstanding under the facility as of September 30, 2022.March 31, 2023. The 2021Amended 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 Amended 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate of Term SOFR rate, as applicable, plus an applicable margin of 3.50% (with step-downs upon de-leveraging). We also have the option to borrow at a rate determined by reference to the base rate.

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

The 2021Amended Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021Amended Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the 2021Amended 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 2021Amended 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 $5.0 million) in the aggregate outstanding exceeds 35% of the total commitments under the 2021Amended Revolving Credit Facility. The 2021Amended Revolving Credit Agreement provides for customary events of default. We were in compliance with all covenants as of SeptemberJune 30, 2022.2023.

We incurred debt issuance costs attributable to the issuance of the 2021Amended Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method over the expected life of the 2021Amended 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 fourth quarter of 2022, a wholly owned subsidiary of the Company repurchased $10.0 million in aggregate principal amount of the Convertible Senior Notes on the open market resulting in a $0.9 million gain on extinguishment of debt. Subsequent repurchases occurred in the first and second quarters of 2023 for $13.9 million and $15.1 million, respectively, in aggregate principal amounts resulting in gains on extinguishment of debt of $0.7 million and $0.6 million, respectively. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable securities law. As of June 30, 2023, $133.5 million aggregate principal remains outstanding and held by third parties.

The Convertible Senior Notes held by third parties are convertible into approximately 3,213,5892,455,360 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.63018.6789 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.68$53.54 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 SeptemberJune 30, 2022.2023.

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 $53.68$53.54 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.

Off-balance Sheet Arrangements

During the ninesix months ended SeptemberJune 30, 2022,2023, we executed various optionforeign exchange contracts which met hedge accounting requirements for the purchase of €18.5€10.9 million and sale of €6.0 million with maturity dates ranging from August 20222023 to MarchOctober 2023. At SeptemberJune 30, 2022,2023, we had optionforeign currency contracts for the purchase of €15.2€10.9 million outstanding.and sale of €6.0 million. The fair value of the foreign currency contracts’ fair value at September 30, 2022,contracts were based on quoted market prices and resulted in an asset of $0.2 million included in Other current assets and a liability of $0.5$0.1 million included in Accrued liabilities.  liabilities at June 30, 2023. During 2021,2022, we did not execute any foreign currency contracts. We had noexecuted various foreign currency contracts for the purchase of €28.9 million and sale of €28.9 million. At December 31, 2022, we had 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 September 30, 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 costs of goods and services, such as food and gas prices have had a substantial negative effect on the purchasing power of consumers. While historically, we have been able to pass on most costincrease prices at a rate equal to or greater than that of inflation, doing so would be difficult in the current inflationary environment. However, we have implemented price increases to our customers, no assurance can be given that we will continue to be able to do so.in areas where doing so has been 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 toregarding 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 20212022 Annual Report on Form 10-K, during the period. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 20212022 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 20212022 Annual Report on Form 10-K, during the ninesix months ended June September 30, 20222023. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 20212022 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.instrument is a revolving credit facility which has no borrowing outstanding.

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 June September 30, 20222023. 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 the material weaknessweaknesses in internal controls over financial reporting that waswere disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022.

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 planconcluded 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 weaknessweaknesses 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 the remediation of this material weakness will be completed by the end of

During the fiscal year 2022.

Other than in connection with aspects ofquarter ended June 30, 2023, we continued to make progress on our remediation plan, there have been no changesplans to address the material weaknesses in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2022 which have materially affected, or are reasonably likely to materially affect, the Company’sreporting. These remediation efforts include hiring additional experienced accounting and internal control over financial reporting.specialists and external consultants. In addition, the Company is in process of redesigning key controls for both business processes and information technology controls along with implementing a new enterprise resource planning system.

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.
 
On October 9, 2020, a purported stockholder of the Company, Paul-Emile Berteau (the “Plaintiff”), filed a complaint in the Delaware Court of Chancery (the “Court”) relating to the merger of Standard Diversified, Inc. (“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 “Action”). The complaint purports to assert two derivative counts for breach of fiduciary duty on TPB’s behalf and against the TPB Board of Directors and certain SDI affiliates (collectively, the “Defendants”). The complaint also 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 Defendants and the Company deny that any of them has committed or threatened to commit any violations of law, breaches of duty or other wrongdoing arising out of or related to any of the conduct, statements, acts or omissions alleged by Plaintiff, and maintain that their conduct was at all times proper, in the best interests of the Company and its stockholders, and in compliance with applicable law. Nevertheless, following a mediation in November 2022, the Defendants agreed to settle with the Plaintiff, because doing so will eliminate the distraction, burden, expense, risks and potential delay of further litigation involving the asserted claims. The parties entered into a Stipulation and Agreement of Compromise, Settlement and Release, dated and filed with the Court on June 27, 2023 (together with the exhibits thereto, the “Settlement Stipulation”).  The Settlement Stipulation includes as an exhibit thereto a Notice of Pendency of Settlement of Action (the “Notice”). On July 12, 2023, the Court approved the form of the Notice.  The material terms of the proposed settlement of the Action are summarized in the Notice and include, without limitation, that the Defendants’ insurers will pay or cause to be paid an aggregate of $5,000,000 into an escrow account (the “Settlement Payment”) in exchange for a release of all claims. The Court has scheduled a hearing on the proposed settlement for November 9, 2023, at 3:15 p.m. at the Leonard L. Williams Justice Center, 500 North King Street, Wilmington, Delaware 19801 to consider whether the terms of the settlement are fair, reasonable, and adequate and whether to approve Plaintiff’s counsel’s request for attorneys’ fees. Also, as described in the Notice, Plaintiff intends to seek an award of attorneys’ fees and expenses related to Plaintiff’s counsel of up to $1,000,000 and an additional mootness fee of up to $500,000 in connection with the third count of the complaint.  Any fee awarded to Plaintiff’s counsel will be paid out of the Settlement Payment and the remaining funds will be paid to the Company.  The proposed settlement is subject to, and conditioned on approval by the Court, and no assurances can be given that such Court approval will be obtained. The impact to the Company is not expected to be material.
A copy of the Notice is attached hereto as Exhibit 99.1, and a copy of the Settlement Stipulation, including the Notice, will be available on the Company’s website at https://www.turningpointbrands.com/investor-relations/resources/notice-of-proposed-settlement/default.aspx. The foregoing description of the terms and provisions of the proposed settlement as set forth in the Notice is a summary only, does not purport to be complete, and is qualified in its entirety by reference to the full text of the Settlement Stipulation, which text is incorporated herein by reference. Interested parties are encouraged to read the entire text of the Settlement Stipulation and the Notice carefully for further information. Information on our website is not incorporated by reference into this Quarterly Report on Form 10-Q.
See ‘Risk Factors—We may become subject to significant product liability litigation’ within our 20212022 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 20212022 Annual Report on Form 10-K. There have been no material changes to the Risk Factors set forth in the 20212022 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. On October 25, 2021, the Board of Directors 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 of Directors 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.Board of Directors. 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 SeptemberJune 30, 20222023 in connection with the repurchase program described above:above.
           Maximum Number 
           (or Approximate 
        Total Number of  Dollar Value) 
        Shares Purchased  of Shares that 
  Total Number  Average  as Part of Publicly  May Yet Be 
  of Shares  Price Paid  Announced Plans  Purchased Under the 
Period 
Purchased (1)
  per Share  or Programs  Plans or Programs 
July 1 to July 31  86,841  $27.93   86,841  $34,578,518 
August 1 to August 31  113,576  $24.53   113,241  $31,800,716 
September 1 to September 30  107,125  $22.51   107,125  $29,389,333 
Total  307,542       307,207     

      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
April 1 to April 30  4,431  $23.65   -  $27,197,886 
May 1 to May 31  -  $-   -  $27,197,886 
June 1 to June 30  -  $-   -  $27,197,886 
Total  4,431       -     

(1) The total number of shares purchased includes (a) shares purchased under the February 2020 share repurchase program (which totaled 86,841 shares in July, 113,241 in August and 107,125 shares in September) 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 3354,431 shares in August)April). Shares withheld by the Company to cover statutory withholdings taxes are repurchased pursuant to the applicable plan and not the authorization under the share repurchase program.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

Exhibit No.
Description
Amendment No 1. Dated as of May 10, 2023, to the Credit Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., the obligors party thereto, Barclays Bank PLC, as administrative agent, and the lenders party thereto (incorporated herein by reference to Exhibit 10.1 of Turning Point Brand, Inc’s Current Report on Form 8-K filed with the Commission on May 16, 2023 (File No. 001-37763) *
  
Rule 13a-14(a)/15d-14(a) Certification of Graham Purdy.*
  
Rule 13a-14(a)/15d-14(a) Certification of Luis Reformina.*
  
Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*
  
Section 1350 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
  
99.1
Notice of Pendency of Settlement of Action *
101XBRL (eXtensible Business Reporting Language). The following materials from Turning Point Brands, Inc.’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2022,2023, filed on October 26, 2022,August 2, 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.*
  
104Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101).*

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

 TURNING POINT BRANDS, INC.
  
By: /s/ Graham Purdy
Name: Graham Purdy
Title:  President and Chief Executive Officer
  
  
By:
/s/ Graham Purdy
/s/ Luis Reformina
  
Name:
  Luis Reformina
Graham PurdyTitle: Chief Financial Officer
  Title:By:  /s/ Brian Wigginton
 President and Chief Executive OfficerName:  Brian Wigginton

  
By:
/s/ Luis Reformina
Name:
Luis Reformina
Title:  Chief Financial Officer

By:
/s/ Brian Wigginton
Name:
Brian Wigginton
Title: Chief Accounting Officer
   
Date:  October 26, 2022August 2, 2023


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